I came across a report by Bank of America Merrill Lynch (BAML) highlighting ten indicators that often appear before the U.S. stock market peaks. According to BAML's database, four of these indicators have recently been triggered, suggesting that the market is 40% of the way to reaching a peak. On average, the market tops out when 70% of these indicators are triggered.

These ten indicators encompass areas such as "optimism," "market valuation," "macroeconomic conditions," and "credit contraction." It's worth considering these signals. Here's a detailed translation and breakdown of the report:

Personal Interpretation: Among the ten peak indicators, the current U.S. stock market has triggered four and is close to triggering five, putting the peak progress bar at around 40%-50%. This indicates an increasing risk level for the U.S. stock market. It doesn't mean an immediate bull-to-bear transition, but rising risk levels imply greater market volatility. Unexpected events could potentially lead to market corrections. If more red flags appear over time, the risk level increases. However, this is a dynamic process; if risks decrease after a short-term adjustment, it might be a good time to enter the market again.

The Ten Indicators:

  1. Consumer Confidence Index (Figure 2): In the six months before a market peak, the Conference Board's Consumer Confidence Index typically reaches above 110. In January 2024, it hit 111, triggering the indicator. Historical data shows that the index exceeding 110 usually precedes a bull-to-bear transition. However, earlier this year, the index only slightly touched 110 and has recently dipped back down a bit. Historically, past bull-to-bear transitions often occurred at much higher levels above 110.
  2. Consumer Sentiment Towards the Stock Market (Figure 3): Also from the Conference Board's survey. BAML found that if the net bullish sentiment among consumers exceeds 20%, it indicates a potential market peak within the next six months. The latest data shows 48% of consumers believe the stock market will be higher in a year, while 25% think it will be lower, resulting in a net bullish sentiment of 23%, thus triggering the indicator.
  3. Sell-Side Indicator (Figure 4): BAML's Sell-Side Indicator (SSI) tracks Wall Street strategists' average recommended stock allocation. The firm notes that extreme bearish sentiment on Wall Street is a bullish signal, and vice versa. In three out of the last six bear markets, the SSI issued a "sell" signal within six months before the market peaked. Currently, the SSI is in the "neutral" zone, between "buy" and "sell" signals, so this indicator has not been triggered.Additional note: On Wall Street, major investment banks are considered sell-side, while pension funds and private equity funds are considered buy-side. Analyst reports typically come from the sell-side, as producing research is part of their services. BAML's SSI tracks sell-side strategists' average stock recommendations. Generally, it's a contrarian indicator: extreme optimism on Wall Street is a bearish signal, and vice versa. This indicator has not been triggered yet. Currently, sell-side institutions on Wall Street are not overly optimistic, showing a neutral level, indicating a certain level of market rationality.