No green light for Bull Rally until 3 things happen

• The start of a new equity bull market will require three catalysts, according to Bank of America.
• Although there is limited upside potential in the near term due to depressed sentiment, sell the S&P 500 at 4,200, BofA said.
• “Don’t think Wall St is unwinding the financial excesses of the past 13 years with a 6 month garden variety bear market,” BofA said.

The stock market is sending mixed messages to investors as sentiment remains depressed, but big economic risks remain front and center, according to Bank of America.

These mixed signals mean the start of a new equity bull market rally is unlikely to materialize until three catalysts occur, BofA’s Michael Hartnett said in a Thursday note.

The catalysts needed to kick-start the next equity bull market are a spike in inflation, a spike in interest rates and a Fed pivot by 2023, according to the note. But a pause or reduction in the Fed’s interest rate hike cycle is “unlikely without a big recession and/or a big credit event,” Hartnett warned.

On the sentiment side, Hartnett said in a Thursday note that stock investors should “buy now” because “the only time you’ve seen this level of pessimism and not making money off the tide in a long , it was Lehman”.

This depressed sentiment can be seen in BofA’s Bull & Bear indicator, which has been stuck at a 0.0 reading for weeks. Other sentiment indicators like CNN’s Fear & Greed Index and AAII’s Investor Sentiment Survey are also showing strong bearish readings.

“Prices reduced a lot of bad news and sentiment [is at] bottom,” Hartnett said, referring to the more than 20% decline seen in the S&P 500 and Nasdaq 100 earlier this year.

But depressed sentiment is no silver bullet for investors to fully re-enter the market, according to Hartnett, as big economic risks remain on the horizon. These risks include continued hot inflation readings, rising interest rates and the real possibility of an economic recession.

Additionally, while investor sentiment is at depressed levels, the actual fund flow data does not fully confirm these sentiments. “Everybody [is] bearish but no one sold,” Hartnett said, pointing out that for every $100 of market inflows since the start of 2021, there have only been $3 of stock outflows.

And for these reasons, investors should take some risk off the table and sell stocks when the S&P 500 hits 4,200, which represents about 6% upside potential from current levels.

“Positioning closest to green light for higher risk/trade appetite, but earnings and politics don’t yet give green light for new uptrend; and don’t think Wall Street is unwinding financial excesses of the past 13 years with a 6-month garden variety bear market,” said Hartnett.