New York, Using history as a guide, Bank of America Securities has floated a “bear market signposts” list for clients to help understand when stocks might be close to bear market territory.
The list of 19 signals by the brokerage ranges from fundamental to sentiment-related indicators and uses data tracking back to 1968.
Data shows that in the past, when more than 80% of the indicators are triggered, a bear market has occurred. A bear market is when stocks fall 20% from their most recent highs.
As per the latest analysis, currently 63% of the bear market signposts have been triggered, up from 47% in January. Since 1968, when 80% of the indicators are triggered, a bear market occurred, meaning stocks fell 20% from their most recent highs.
Bank of America equity and quant strategist Savita Subramanian said in a recent note to clients.
The signposts list was almost triggered in October of 2018 when it hit 79%. The S&P 500 went on to briefly dip into bear market territory on an intraday basis following that signal, and suffered its worst December since the Great Depression. The Fed raising rates, as they did in 2018, is a trigger on the bear market signal list, as bear markets have always been preceded by the Fed hiking rates by at least 75 basis points from the cycle trough.
The list of the bear market indicators from Bank of America includes Federal Reserve raising interest rates, tightening credit conditions, minimum returns in the last 12 months of a bull market have been 11%, minimum returns in the last 24 months of a bull market have been 30%, low quality stocks outperform high quality stocks (over six months), momentum stocks outperforming (over six to 12 months), growth stocks outperforming (over six to 12 months, 5% pullback in stocks over the last year, stocks with low price-to-earnings ratio underperform, conference Board’s consumer confidence level has not hit 100 within 24 months, conference Board’s percentage expecting stocks go higher, lack of reward for earnings beats, sell side indicator, a contrarian measure of sell side equity optimism, Bank of America Fund Manger Survey shows high levels of cash, inverted yield curve, change in long-term growth expectations, rule of 20, trailing price-to-earnings ratio added to CPI is above 20, volatility index spikes over 20 at some point within the last 3 months and earnings estimate revisions rule.
