BAML: The S&P 500 could soar 400 points — and that may be a terrible thing

REUTERS/Nikola Solic

Stock market strategists are getting more bullish, and while that may be a good thing in the short-term it could lead to problems down the line.

Sentiment among so-called sell-side strategists has spiked in the post-election surge for stocks, according to Savita Subramanian, Bank of America Merrill Lynch's head of quantitative and equity strategy.

"In November, the Sell Side Indicator — our measure of Wall Street’s bullishness on stocks — jumped by 1.6 percentage points to a six-month high of 51.5, its biggest increase in over a year," wrote Subramanian in a note to clients on Thursday.

This still means that strategists are bearish overall. Even though sentiment is rising, Wall Street's enthusiasm is still below highs from last summer.
The indicator is a contrarian one, thus when the sell-side is bearish it is time to buy stocks and vice versa. So right now, its still signaling that stocks could climb significantly over the next year.

Screen Shot 2016 12 01 at 9.07.09 AMREUTERS/Nikola Solic

"With the S&P 500’s indicated dividend yield currently above 2%, that implies a 12-month price return of 17% and a 12-month value of 2576," said Subramanian.

But that's where things will start to roll over. That jump, which would be 378 points above Wednesday's close, would most likely come with a corresponding surge in sentiment and the contrarian indicator will start to flash "sell."

"But the post-election bounce in Wall Street sentiment could be the first step toward the market euphoria that we typically see at the end of bull markets and that has been glaringly absent so far in the cycle," said Subramanian.

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