The stock market, as measured by the S&P 500 Index (SPX), is on a tear, up by 16.4% year-to-date through the close on May 2, 2019. Through April 30, the YTD gain was 17.5%, the best four-month run since Dec. 2010 and the best opening four months of a year since 1987. The bears point to the laws of gravity and see sharply lower gains ahead. Meanwhile, the Sell Side Indicator from Bank of America Merrill Lynch, a contrarian forecasting tool, predicts an additional gain of about 9% in the 12 months ahead, or 11% if dividends are included.

“If we see the breakout above that September high, which was right around 2,941-- if that breakout is confirmed meaning we spend more than just a week above it, then we should see long term follow through on the back of that breakout,” is the opinion of Katie Stockton, founder and managing partner of technical analysis firm Fairlead Strategies, in remarks on CNBC. The table below summarizes BofAML's forecast, as well as other bullish signs.

Why The Bull Market Has Plenty Of Room To Rise

  • BofAML Sell Side Indicator: S&P 500 reaches 3,198 in 12 months.
  • That would be a 27.5% cumulative gain since the start of 2019.
  • The Federal Reserve is maintaining its dovish stance on interest rates.
  • Consumer spending and job growth remain strong.
  • The unemployment rate is at a 50-year low.
  • Corporate earnings are coming in better than expected.
  • Much bad news already is baked into stock prices.
  • History suggests that further gains follow record market highs.
  • "Sell in May and go away" has been bad advice in the last 10 years.

Sources: Bank of America Merrill Lynch, CNBC, MarketWatch.

Significance For Investors

"The Sell Side Indicator is based on the average recommended equity allocation of Wall Street strategists as of the last business day of each month," BofAML explains in their May 1 report. The indicator dropped to 57.6% as of the end of April, reaching a six-month low. "When our indicator has been this low or lower, total returns over the next 12 months have been positive 92% of the time," the report advises. Based on history, the indicator projects a total return of about 11% for the S&P 500 over the next 12 months, consisting of a 2% dividend plus price appreciation of approximately 9%.

BofAML hastens to add that their official "market call" for the S&P 500 is that it will end 2019 at 2,900, down slightly from today. They note that the Sell Side Indicator is just one of five factors that they use to make their market call.

"Record highs tend to be supportive of, rather than detrimental to, near-term returns," writes Mark Haefele, chief investment officer (CIO) at UBS, as quoted by MW. "Using S&P price data since 1950, after stocks set an all-time high, their subsequent six-month price return has been 4.7%," he added, continuing, "The market has just 11% of the time declined by more than 5% over the six months following an all-time high, compared with 18% of the time otherwise." Based on intraday trading, the S&P 500 reached an all-time high on May 1, while the record close was on April 30.

"Sell in May and go away" reflects that fact that, for decades, average gains for the S&P 500 during the six months from May through October were near zero. However, during the last ten-year and five-year periods, gains during the May to October time frame have averaged about 4%, per analysis by Dow Jones Market Data cited by MW.

Looking Ahead

A bearish reading of market history is offered by Ryan Detrick, senior market strategist at LPL Financial. "There are four other years since World War II that the S&P was up at least 15% to kick off the year like we're going to be this year. Three of those years are virtually flat during these worst six months of the year [i.e., May through October], the other was 1987 when we lost about 13%,", he wrote in a note to clients. Nonetheless, Detrick remains bullish longer term, adding, "Fundamentally things still look good."