Stocks still have room to fall as several bullish indicators have not been triggered yet, Bank of America said Friday.
On a macro scale, BofA analysts said the economy still shows the “early innings” of a downturn.
Of its 10 bull-market signals, only four have been triggered, while past market bottoms had eight or more flashing.
Bank of America’s bull-market indicators suggest that stocks haven’t hit bottom yet, as less than half have been triggered so far, analysts said in a Friday note.
Of the bank’s 10 consistent signposts of a bull market, only four have flashed as of Friday. In the last seven prior market bottoms, however, eight or more of those signals were triggered, the analysts said.
Currently, indicators point to the US economy being in the early stage of a downturn, they added, and the 17% stock jump after June’s low was a bear market rally.
The 10 indicators are categorized into four groups: policy, valuations, macro, and sentiment/technical, according to Bank of America. None of the indicators in the latter two groups have been triggered.
The four indicators that have been triggered include a rise in unemployment versus the 12-month low, a 5% bear market rally, an improved PMI, and the AAII US Investment Sentiment Readings.
As far as valuations, analysts said that stocks aren’t cheap enough. One bull signal with a perfect track record — BofA’s so-called Rule of 20 — suggests it’s too early to buy still.
“The rule is simple: CPI + trailing P/E should be less than 20 ahead of a market bottom,” analysts wrote. “Today’s sum is 27, (P/E=18.4, CPI=8.5%) and valuations imply 3% CPI based on a longer term historical relationship.”
Meanwhile, BofA highlighted that the Fed has cut rates before a market bottom during the past seven bear markets, adding that the stocks hit their floor on average 11 months after the first rate cut. But the Fed is still in a tightening cycle and widely expected to deliver another jumbo rate hike later this month.
Meanwhile, the 2-year Treasury yield continues to rise to cycle highs, analysts said, whereas before previous bull markets the indicator would fall at least 50 basis points from its six-month highs.
In a separate note on Friday, Bank of America said the stock market is poised to hit new lows this year as fast inflation leads to a slow recession shock.
In their forecast, strategists said stocks will drop and yields will pop as more rate hikes loom.
“Jackson Hole marked the end of ‘Mission Accomplished’ summer trade of peak CPI, peak yields, [and expected] Fed cuts in 2023,” BofA’s Michael Hartnett wrote in the note.
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