- There are growing signs that a 7% sell-off in the S&P 500 is imminent, according to a Tuesday Bank of America note.
- BofA highlighted rising credit spreads as a potential canary in the coal mine for stocks.
- "Rising credit spreads suggest deteriorating credit conditions as the SPX has embarked on its summer rally," the bank said.
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The S&P 500 is facing a big risk as its summer rally extends into mid-August, Bank of America said in a note on Tuesday.
The bank highlighted rising credit spreads as a big risk for the S&P 500, as it signals deteriorating credit conditions even as the market hits new record highs. The S&P 500 closed at a record high on Monday for the 49th time so far this year, and is up more than 2% over the past month.
"Rising credit spreads suggest deteriorating credit conditions as the SPX has embarked on its summer rally. We view this as a bearish divergence and risk for US equities," the bank said.
Investors have often looked to credit spreads as a gauge investor sentiment in markets, as it signals the willingness to take on risky credit.
That's not the only bearish divergence flashing for the stock market. The bank highlighted cumulative net up volume in the S&P 500, the percent of S&P 500 stocks above their 200-day moving averages, and the NYSE advance-decline line as failing to confirm the recent record highs in stocks.
The bank highlighted potential levels of support that may come into play if a sell-off materializes. Those levels include 4,164, which represents potential downside of 7% from Monday's close.
But if the S&P 500 continues to show resiliency and a sell-off doesn't materialize, Bank of America said upside risk for the stock market could include a melt-up to 4,600, representing potential upside of 3% from Monday's close.
With the S&P 500 down as much as 1.5% in intraday trades on Tuesday, Bank of America's downside view for the market could be getting started.
