Bank of America flags caution as investors pour $40 billion into the stock market

By Barbara Kollmeyer

As the holiday and Santa Rally season draws near, one Wall Street bank is telling investors to curb their enthusiasm where stocks are concerned.

A contrarian "buy" signal for stocks has now expired, weeks after it was triggered, said a team at Bank of America led by strategist Michael Hartnett on Friday.

On Oct. 20, the strategists flagged that their Bull & Bear Indicator was in "extreme bearish" territory at 1.9 from a previous 2.2. A contrarian buy signal for riskier assets is triggered when the bank's so-called Bull & Bear Indicator drops under 2.0.

But on Friday, they reported that indicator had crept up to 2.1 from 1.7 and pushing it into "neutral" territory, as this chart shows:

The indicator has risen as some investors have had a love-in with stocks lately. In its latest Flow Show report that is released every Friday, the bank reported the biggest two-week inflow to stocks -- $40 billion -- since February 2022.

Hartnett has cautioning that investors have had a collective one-track mind when it comes to the view that the Federal Reserve is done with interest-rate hikes, with almost no contrarian views out there. In Bank of America's November survey 80% of fund managers said they expected lower interest rates, with 82% calling for lower inflation and 61% for lower bond yields.

Read:Stock-market investors are convinced the Fed is finished with rate hikes. Why it isn't a done deal.

The analyst and his team have cautioned that the 10-year Treasury yield could make for a difficult year to come, with 4% to 5% "risk on" for markets, but a drop to 3% to 4% likely to spark recession talk, a more bearish risk.

The latest week ended Nov. 21 saw $40 billion flowing into cash instruments, with $16.5 billion to stocks, $4 billion in bonds and $700 million to gold.

And cash has clearly been the winner this year, with Bank of America reporting that $1.2 trillion has flowed into those short-term instruments, short-term instruments like 3-month bills BX:TMUBMUSD03M. Some $186 billion has gone to Treasurys, and $143 billion to equities.

Read: This banking giant has been saying cash is king. Now it advises a switch to stocks.

With just a few days left to finish November, the S&P 500 SPX has gained 8.6%, which if the level holds, would mark the best monthly return for the index since July 2022, according to FactSet.

The index got a big boost last week when a subdued inflation reading sparked a buying frenzy and the best day for the S&P 500 and Nasdaq since April. The inflation data fueled hopes that the ground has been laid for a year-end rally for stocks.

While Hartnett and his colleagues have expressed caution, the bank's head of equity and quantitative strategy, Savita Subramanian, said she expects the S&P 500 index will end next year at 5,000, a 10% gain from here.

Part of the reason is "too many skunks at the party," she says, referring to "conviction-less equity bears," apart from AI enthusiasts and fund managers and others sitting on lots of cash. Her 2023 forecast of 4,600 for the S&P 500 is looking far more accurate, unlike the majority of her overly cautious Wall Street rivals.

Read: RBC and BofA see S&P 500 heading to 5,000 in 2024, but here are 10 reasons why investors should still tread carefully

-Barbara Kollmeyer

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11-24-23 1626ET

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