Indicator with perfect record says no bottom yet

  • Stocks still have room to fall, and investors shouldn’t rule out the possibility of a hard landing just yet, Bank of America says.
  • Only 30% of the company’s bull market indicators have been activated, versus more than 80% in previous market bottoms.
  • Moreover, according to BofA, one signal with a perfect track record must still signal a bottom.

It’s too early to call a market bottom, and technical indicators are showing stocks have more room to fall — including a board with a perfect track record, according to Bank of America.

Analysts emphasized in a note to customers on Wednesday that the so-called rule of 20 dictates that the sum of annualized CPI growth and lagging P/E was always below 20 when the market bottomed out. But right now it stands at 28.5, with P/E at 20 and the latest CPI showing a gain of 8.5%.

Other indicators also suggest that the bottom has not yet been reached.

“Only 30% of our bull market signals (things that happen before a market bottom has been reached) have triggered versus 80%+ in previous market bottoms, suggesting another pullback is likely,” BofA analysts wrote.

Bank of America bottom indicator

BofA Global Research

Those additional indicators that have usually occurred before a market bottom include Fed rate cuts, rising unemployment, the Sell Side Indicator providing a buy signal, and a steeper yield curve.

But the Rule of 20, in particular, is the only BofA list data point that has appeared on every market floor since September 1974.

“Except for inflation dropping to 0%, or the S&P 500 dropping to 2500, a 50% earnings surprise would be required to meet the rule of 20, while consensus is aggressive and we think already unachievable growth of 8% in 2023.” ‘, analysts wrote.

Separately, the combination of lower interest rates and equity risk premium since June suggests markets are raising expectations for a soft landing, the note said.

Still, the bank’s analysts warned that a Fed-induced hard landing — when rising interest rates plunge the economy into recession — should not be settled prematurely.

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