BofA’s Subramanian Says Wall Street Hasn’t Fully Capitulated Yet

(Bloomberg) — US equity sentiment held steady in September even as the S&P 500 Index suffered its worst monthly drop since the depths of the coronavirus pandemic in March 2020, according to a group of strategists at Bank of America Corp. led by Savita Subramanian.

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BofA’s Sell Side Indicator, which tracks Wall Street sentiment toward US equities on a monthly basis based on asset-allocation recommendations provided to the bank and Bloomberg, was essentially flat in September at 53.6% despite a 9% selloff in the S&P 500.

That’s a sign that there is “no full capitulation on Wall Street yet,” Subramanian wrote in a note to clients on Monday. Although Wall Street’s recommended allocation to cash rose 0.9 percentage points to 3.7% this year, it is still far below the 10.5% level between 2006 and 2007.

The gauge has been a reliable contrarian indicator over time, according to Subramanian. “In other words, it has been a bullish signal when Wall Street strategists were extremely bearish, and vice versa,” the note said.

Historically, when the indicator was at current levels or lower, the benchmark index’s subsequent returns over the following 12 months were positive 96% of the time, with a median return of 21%, BofA data show.

While the bank’s indicator is currently in “neutral” territory, a less predictive range, it remains closer to a “buy” than “sell” for a fifth consecutive month.

Even so, key technicals will likely need to capitulate before the S&P 500 can truly bottom, according to BofA’s technical strategist Stephen Suttmeier. Although the US equity market typically turns bullish in the fourth quarter of midterm election years, capitulation remains elusive in equity put-call ratios and S&P 500 selling volume.

Investors should be on alert for a “climactic spike” in selling volume, Suttmeier wrote in a note to clients on Friday. The S&P 500’s Volume Intensity Model (VIM) Distribution, which measures down or selling volume, has risen sharply since mid-August to 66.4, confirming “the August into October correction for the SPX,” BofA data show.

“But a contrarian bullish panic spike above the December 2021 and March 2022 peaks near 72-73 may be needed to solidify” a market bottom, especially if the S&P 500 continues to undercut its June intraday low of 3,636 in October, he said.

Additionally, the 5-day and 25-day Cboe equity put-call ratios “may require spikes above 1.2 and 1.1, respectively,” for a sustainable S&P 500 low, Suttmeier explained. Currently, the ratios are at 1.09 for the 25-day and 1.07 for the 5-day.