- Investors should sell stocks and raise cash as the S&P 500 pushes up against the 4,400 level, Bank of America said in a note on Tuesday.
- The bank sees bearish technical indicators piling up for the index as negative divergences persist.
- "Sell strength into the 4,400s, especially with the arrival of bearish August-October seasonality next week," BofA said.
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Investors should take advantage of any strength in the S&P 500 and sell stocks to raise cash as bearish indicators begin to pile up, Bank of America said in a note on Tuesday.
The bank points to negative divergences and a deterioration in market breadth, or upside participation of stocks in the market, as reasons to sell when the S&P 500 pushes up against the 4,400 level. In recent weeks, most gains in the stock market have been driven by a narrow group of companies including mega-cap tech names like Alphabet, Amazon, and Apple.
"We continue to flag lower highs from the S&P 500, NYSE stocks, NYSE all issues and US top 15 most active advance-decline lines moving into late July," BofA explained.
The arrival of bearish seasonality in the stock market is another reason to sell into strength, according to the note. "Sell strength into the 4,400s, especially with the arrival of bearish August – October seasonality next week," BofA said.
The S&P 500 could find support around 4250 and 4100 if stocks begin to turn lower, representing potential downside of 3% and 7% from Wednesday's close.
Along with the bearish divergences and weak seasonality, margin debt has soared to a record high of $882 billion in June. This represents an elevated risk for US stocks if margin debt ultimately peaks.
"Although peaks in margin debt don't always coincide with highs for the S&P 500, they tend to be bearish for US equities," BofA said.
