Source: Jin10 Data

Due to a large number of customer inquiries on whether the US stock market is ready for a turnaround, Savita Subramanian and her team, Bank of America's quant strategy analyst, recently released 10 quantitative indicators that historically signal bull market tops.

Four of these indicators are currently flashing warnings of an approaching peak. However, typically market peaks require at least seven indicators to issue warning signals.

So what should you do? If you are a long-term investor regularly investing major US market benchmarks such as the S&P 500 index, Dow Jones Industrial Average, and Nasdaq Composite Index, it is best to do nothing.

How to seize the market timing? Few can get it right. For example, if you missed the best 10 trading days for the S&P 500 index from 2010 to 2020, you would have gained 95% return instead of 190%. Subramanian points out that holding onto the investment is usually better than making emotional sells.

However, if you are a trader or use margin to buy stocks, you may want to slow down now. Maybe just hold the initial position, or do nothing, as better prices may come in the future. July is known for market retracements. According to Jason Goepfert of SentimentTrader, there are more significant declines in the US market than any other month.

Here are four market top indicators flashing red and six additional warning signals that Bank of America analysts are monitoring.

Many of these indicators are sentiment indicators. When investors and consumers are extremely optimistic, you might think that this is a good sign. But in fact, from a contrarian perspective, the opposite is true. When everyone turns bullish, it is not a good sign. In the stock market, the views of the masses are often wrong because the following traps exist:

Four signs that the market is about to reach its peak

• The Consumer Confidence Index of the Conference Board usually reaches 110 within six months after the market peak. The index was 111 in January. This is a contrarian signal of excessive consumer confidence, indicating that they may soon reduce their shopping.

• In the Conference Board survey, the net proportion of bulls stocks exceeds 20% within six months before the market peak. The indicator recently triggered this signal at 23%. The calculation method is to subtract the percentage of expected stock price increases from the percentage of expected price declines.

• Banks usually tighten lending standards before the market reaches its peak. They may feel the economic slowdown or even worse. Analysts point out that 16% of banks in senior loan officer surveys say they are tightening lending standards. This is enough to cause concern.

• The inverted yield curve is a signal of weakened growth expectations in history. In five out of eight bear markets, the yield curve was inverted within six months before the crash. The yield curve has been inverted since July 2022, and it is the longest time of inversion on record. So far, it has failed to predict an economic recession.

Six indicators to watch carefully

Of the following six indicators, as long as three of them become warning lines, the analyst's system will call for the market peak.

• Merger and acquisition often soars before the market peak due to CEOs and board of directors being too confident. This signal is triggered when the number of mergers and acquisitions is more than one standard deviation above the 10-year average. This indicator has not even approached the signal of the market peak.

• High valuations usually indicate market peaks. This indicator is close to a warning signal. Bank of America's indicator adds the rolling P/E ratio of the S&P 500 index and the annual change of the US consumer price index, which is currently 27.0. This is 0.9 standard deviations higher than the 10-year average and close to the one standard deviation cutoff line indicating market peaks.

• Growth stocks usually outperform value stocks before market peaks. Indeed, in the last six months, value stocks have underperformed growth stocks, but have not reached the level of at least 2.5 percentage points behind value stocks, which is a signal indicating market peaks. Here, analysts compared the front and back ten percentiles of the PE of the S&P 500 index.

• The market usually tells us that there will be debt problems before the market peak. Here, analysts track a proprietary credit pressure gauge. It considers factors such as credit availability, loan levels, changes in debt ratings by credit rating agencies, and the number of troubled debts. This indicator usually falls below 0.25 within six months before the market peak. Currently it is 0.39.

• Bank of America strategist focuses on a proprietary selling indicator that measures the recommended allocation of stocks and cash by Wall Street strategists. The latest reading is in the neutral zone, between buying and selling.

• Similarly, Bank of America tracks analysts' long-term growth expectations for Standard & Poor's 500 companies among sellers. This is a unique indicator. The more bullish the analyst, the greater the likelihood that the stock will fall. The market peak usually occurs when the growth expectation exceeds one standard deviation above the average level. Currently, it exceeds the average level of one year by 0.02 standard deviations, far from predicting a market peak.

Three market peak indicators that can be safely ignored.

• Many analysts are concerned that the Standard & Poor's 500 index is being driven up by large technology companies.$NVIDIA (NVDA.US)$, $Apple (AAPL.US)$, $Amazon (AMZN.US)$, $Microsoft (MSFT.US)$ and $Alphabet-A (GOOGL.US)$However, Bank of America said that the fact that only large technology stocks are leading the way is not enough to sound the alarm bell. After years of large technology stocks leading, the stock market has risen about 75% of the time.

• Similarly, you will hear many analysts tell you that the CBOE Volatility Index (VIX) at the Chicago Board Options Exchange, which has remained low, is a negative indicator for the stock market. Please ignore them. Historically, a low VIX "does not necessarily mean that the market is too comfortable and may explode at any time," analysts said.

• Finally, there is an indicator called "r-star," which is considered the neutral short-term interest rate of the U.S. economy. Currently, r-star is slightly above 1%, far below the federal funds rate of 5.25% to 5.5%. This indicates that the federal funds rate is restrictive and may cause the economy to slow down or even worse. However, r-star was far below the federal funds rate during all bull markets from the 1970s to the 1990s, and this indicator was actually useless. Bank of America concluded that although r-star seems restrictive, stocks can still achieve strong returns with lower leverage and lower floating rate risk.

Editor / jayden