Stock market bullishness is at a 13-year high, but euphoric sentiment also means it may soon be time to sell, Bank of America says

• Bank of America said bullishness in the stock market is the highest in 13 years.
• But its contrarian Sell Side Indicator is very close to tilting into an area that will signal to investors that it's time to sell.
• BofA said it still prefers cyclical stocks.

Investors are the most enthusiastic about stocks since the global financial crisis more than 10 years ago but the market is edging closer to indicating that it's time to sell, Bank of America said Monday.

Wall Street's bullishness on stocks is a reliable contrarian indicator, BofA said in a note showing that its Sell Side Indicator rose to a 13-year high of 59.8% in April from 59.4% in March. The indicator is based on the average recommended equity allocation of Wall Street strategists.

The indicator is also 50 basis points away - at 60.3% - from the contrarian 'sell' threshold.

"Increasingly euphoric sentiment is a driver of our more cautious outlook as we believe that vaccine deployment, economic reopening, stimulus, etc. are largely priced in," said equity strategists led by Savita Subramanian. "We have not seen a 5% pullback in six months ... nor have we experienced a 10% correction in 14 months."

Pullbacks in stocks occur on average 3 times per year and corrections historically are a once-per-year phenomenon, BofA said. A correction is widely considered a decline of 10% or more in an index or an asset from its most recent high.

The signal to sell stocks is at its closest since May 2007, after which the S&P 500 dropped by 7% in the subsequent 12 months, said BofA. The indicator is currently pointing to 12-month returns of 6%, a "much weaker outlook" compared with an average 12-month forecast of 14% since the end of the global financial crisis.

Bullishness among investors was on display through Wall Street's three widely watched indexes which in April hit record highs. April proved to be a good month for US equities, with the S&P 500 index climbing by 5.2% and the Nasdaq Composite gaining 5.4%. The Dow Jones Industrial Average rose 2.7% and crossed above 34,000 for the first time. Investors pushed stocks up as corporate earnings have come in ahead of analyst expectations and more economic data point to further recovery in the world's largest economy from the COVID-19 pandemic.

Equity allocations since March 2020 have risen more than 3.5 times faster than they typically do following bear markets, the strategists said. Stocks crashed in March of last year as the coronavirus health crisis accelerated.

"Lofty valuations, juxtaposed against the potential for bad inflation, rising rates, and higher taxes on corporates and consumers. But we are bullish on economic / profits / capex growth, driving our preference for cyclical stocks," wrote Subramanian.