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- Stocks could be headed for a rally this summer, according to Bank of America
- Analysts pointed to indicators that suggest the market will dip in May before rallying.
- The S&P 500 could blow past its previous highs, potentially adding 5%, the bank said.
Signals are flashing that could mean stocks are headed for a "summer rip," according to Bank of America technical strategist Stephen Suttmeier, who suggests investors should buy a potential dip in equities in May before the rally hits in the following months.
Various technical indicators flashing point to stocks hitting a bearish patch before surging higher, Suttmeier said. He noted that measures of three-month VIX versus the broader volatility index, which measures the three-month expected volatility of the stock market compared to the 30-day expected volatility, peaked below a ratio of 1.25, a level that typically precedes downside for stocks.
"Peaks in this indicator below the overbought threshold of 1.25 spelled trouble for the S&P 500 (SPX) in March, August and December 2022. A similar pattern in late April sets up ahead of weaker seasonality in May that tends to precede a summer rally," Suttmeier said in a note on Tuesday.
A future boost in stocks is getting support from the Dow Theory, which suggests the market could see renewed upside if one of segment of the Dow Jones Industrial Average surpasses a previous high.
"Dow Theory remains on an early 2022 sell-signal, but a December into March bullish divergence (a higher low for the Transports vs a lower low on the Industrials) and a shift to rising 200-day MAs on both the Dow Transports and Dow Industrials provide green shoots for this technical backdrop indicator that suggest buying a May dip for a summer rip," he added.
The S&P 500 could tack on as much as 5% during its "summer rip", Suttmeier estimated. He sees the benchmark index rising beyond its previous highs of 4195 to 4325, particularly if certain breadth indicators suggests a higher proportion of stocks are gaining versus losing.
Predictions of a summer rally are contrary to views from other big banks, which have called for more pain ahead for the stock market as earnings weaken and the economy slows. Stocks could tumble at least 15% in event of even a mild recession, JPMorgan forecasted, with some elite investors like Jeremy Grantham predicting as much of a 50% plunge in the market.