MW This contrarian stock-market indicator is about to flash red. What that means for investors.

By Barbara Kollmeyer

Bank of America says Wall Street strategists are too bullish.

The news pipeline has had this stock market and investors thrashing about lately. And that looks set to continue, with China now jumping into the tariff fray, and equities looking weaker for Tuesday.

That's as we're still in the belly of earnings season, with results from a big Nvidia competitor looming after the close.

Stepping away from the headlines that make the market these days, our call of the day from Bank of America flags a contrarian stock market indicator that they say is just a whisker away from a "sell signal."

BofA's sell side indicator, tracks average recommended equity allocations by Wall Street strategists. In January, that it climbed to 57%, the highest since early 2022 and a mere 1 percentage point shy from a sell signal, Savita Subramanian, equity and quant strategist, and her colleague Victoria Roloff, told clients in a note.

In other words, when so many strategists are saying buy stocks, the best plan of action may be to not follow the herd. When the indicator has been at the 57% level or higher, returns for the next 12 months were positive 65% of the time versus 82% overall, BofA said.

So the bank's voicing caution in a crowded market, as they put it.

"The [sell-side indicator] has been a reliable contrarian indicator. In other words, it has been bullish when Wall Street was extremely bearish and vice versa," and now sits at the closest to a sell signal since December 2021, said Subramanian and Roloff.

Last month, those strategists left their equity allocations unchanged after a 2.8% gain for the S&P 500 SPX in December, which suggests a wait-and-see approach on trade tensions and any policy risks, said the BofA team.

"The current level of 57% implies an estimated price return of 10.5% over the [next twelve months], lower than the past two years but still healthy. We see this as support for our view that 2025 is a year for buying stocks, not the index," they said.

Societe Generale has predicted 2025 will be the best stock picking period in 25 years, citing reflationary policies from President Trump's administration, such as lower taxes, less regulation and lower oil prices, which they say can all yield potential stock picking ideas.

Plus: Stock market's wild ride on Monday could be a microcosm of what to expect in 2025

The markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are lower, while Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y are rising, and the ICE Dollar Index dollar DXY is down 0.4%. Oil prices (CL.1) are also dropping.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              5994.57    -0.29%  0.32%   1.92%  21.28% 
   Nasdaq Composite                                                     19,391.96  0.26%   -2.38%  0.42%  24.33% 
   10-year Treasury                                                     4.574      3.00    -13.20  -0.20  45.10 
   Gold                                                                 2843.2     3.65%   7.42%   7.73%  39.27% 
   Oil                                                                  72.04      -1.45%  -1.89%  0.24%  -1.04% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

China slapped retaliatory tariffs on the U.S. for coal, liquefied natural gas, crude, agricultural machinery and large-engine cars, and will probe Alphabet's Google $(GOOGL)$ over alleged antitrust violations, a day after Trump said he would delay Mexico and Canada tariffs for a month.

In the earnings spotlight, Google's parent Alphabet (GOOGL) will report after the close, alongside Nvidia competitor AMD $(AMD)$ and Chipotle $(CMG)$.

PepsiCo $(PEP)$ logged a third-straight quarterly miss on revenue and shares are falling. Pfizer $(PFE)$ and PayPal (PYPL) earnings are also coming.

Job openings and factory orders are both coming at 10 a.m. We'll hear from Fed officials throughout the day - Atlanta Fed Pres. Raphael Bostic, San Francisco Fed Pres. Mary Daly and Fed Reserve Vice Chairman Philip Jefferson.

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The chart

The above chart shows the explosive growth of retail participation in options market over the past few years, which surged during the pandemic, according to derivatives and exchange network CBOE. That market clearly just keeps getting bigger. The CBOE $(CBOE)$, which has also been pushing for more real-time trading data, said a record 12.2 billion options contracts traded in the U.S. in 2024, up 10.6% from 2023's total, a fifth-straight record year.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   NVDA    Nvidia 
   PLTR    Palantir Technologies 
   TSLA    Tesla 
   GME     GameStop 
   AAPL    Apple 
   HOLO    MicroCloud Hologram 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 
   SMCI    Super Micro Computer 
   MSFT    Microsoft 

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-Barbara Kollmeyer

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February 04, 2025 06:35 ET (11:35 GMT)

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