The key indicator is closer to the buy signal than the sell signal

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  • A Wall Street indicator looks more bullish as investors look for signs that the current selloff has nearly run its course.
  • Bank of America’s sell indicator fell to 55.0% in May from a lower-revised 55.7% in April.
  • This marks the fifth consecutive decline and brings the SSI closer to a buy signal rather than a sell signal since September 2020.

A stock indicator looks increasingly bullish as investors look for signs that the current selloff has nearly run its course – potentially marking a green light for further buying.

Bank of America’s sell indicator, which tracks the average allocation to equities recommended by U.S. sell strategists, fell to 55.0% in May from a lower-revised 55.7% in April.

The latest reading marks the fifth consecutive monthly decline and brings the SSI closer to a buy signal rather than a sell signal for the time since September 2020, when the S&P 500 began a 30% rally during the month. next year, according to a note from BofA analysts. by Savita Subramanyan.

BofA said the SSI shows sentiment has deteriorated but does not yet indicate capitulation, or the point that some see as the bottom of a sell-off where investors throw in the towel.

Yet when the SSI has been this close or closer to a buy signal, short-term S&P 500 returns have historically been positive 96% of the time, analysts said.

“In our view, there are reasons to be constructive in the near term (especially amid bearish sentiment), but continued


volatility

is likely,” they said. “We recommend sticking to high quality and a mix of defensive and inflation/rates beneficiaries.

Optimism comes as


Federal Reserve

measures to further tighten monetary policy in an environment of high inflation. The Fed raised rates by 50 basis points on May 4 and signaled that further increases of a similar magnitude would continue until inflation returns to its 2% target.

Fed Chairman Jerome Powell doubled down on those sentiments, telling the Wall Street Journal that the central bank will “go until we feel we are at a place where we can say financial conditions are at a place appropriate”.

But some of the factors underlying inflation may be beyond the central bank’s control, with BlackRock’s Larry Fink saying much of the current situation has more to do with underlying policy and supply issues that will not be quickly resolved with a tightening.

“You can argue that fiscal and monetary policy excesses have contributed to inflation, but there are several supply-side factors, such as supply chain and logistics bottlenecks, lower labor force participation and higher energy and food prices, which had a more pronounced impact on inflation,” said Richard F. Moody, chief economist at Regions Financial. .

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