Key contrarian indicator falls to 9-month low as stock investors grapple with heightened global risk

Even as worries about emerging markets and President Donald’s trade war continue to dog the stock market, a closely watched contrarian indicator hit its lowest point in months, underscoring the market’s resilience at a time when global risk looms large.

“In August, the Sell Side Indicator — our gauge of Wall Street’s bullishness on stocks — dipped slightly for the second month in a row to 56.4 from 56.9,” said Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, in a Tuesday note. “The indicator is currently at a nine-month low, a reversal from the rapid rise in sentiment from the middle of 2016 through the end of last year.”

The indicator, based on recommended equity allocation of Wall Street strategists, serves as a contrarian barometer in that when the index is bullish, it is usually the opposite for the market, and vice versa.

As it stands now, Subramanian projects a 12-month price return of more than 10% and a 12-month target of 3,202.

“Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 94% of the time, with median 12-month returns of plus 19%,” she said.

Bank of America Merrill Lynch

Jonathan Golub, chief U.S. equity strategist at Credit Suisse, also projected more upside for stocks, forecasting the S&P 500 to hit 3,350 in the next 16 months.

“The next 16 months will be particularly tricky for investors, with the threat of yield-curve inversion, potentially disruptive midterm elections, and continued Fed tightening,” he wrote in a report. “Despite these headline risks, we believe that solid economic/EPS growth and benign recessionary risks will be sufficient to propel the market higher.”

The stock market has been surprisingly placid even as Argentina and Turkey reel from currency meltdowns

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