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Climbing the ‘Wall of Worry’: Stocks May Leap 10% Amid Investor Pessimism

Brace yourselves, investors, as we could be on the brink of a significant market rally. The stage appears to be set for the stock market to jump 10% from current levels. Bank of America’s recent analysis suggests that investors are in a state of high alert, awaiting a fiscal apocalypse amid looming debt ceiling confrontations and extreme investor pessimism.

According to Bank of America’s technical analyst, Stephen Suttmeier, stocks typically “climb a wall of worry and slide on the slope of hope.” At present, the scales are heavily tipped towards worry over hope in the stock market.

This anxiety-ridden market sentiment is evident in the latest AAII weekly investor sentiment survey. Just 23% of respondents expressed optimism for stocks over the coming six months. Furthermore, leveraged funds are fervently shorting stocks at a rate not witnessed in over a decade.

In a telling sign of risk aversion, a record flood of cash has poured into money market funds recently, with an unprecedented total of more than $5 trillion idling on the sidelines.

Suttmeier proposes that these factors—sentiment, positioning, and cash levels—paint a picture of investors who are bracing for a financial catastrophe. However, if their worst fears fail to materialize or are postponed, the market could witness a catch-up rally phase, fueled by the fear of missing out (FOMO).

Looking back, the current stock market conditions echo episodes of worry seen during the US-China trade war in 2019, the Brexit vote and the Trump election in 2016, and the eurozone debt crisis in 2012. Despite these intense periods of investor anxiety, stocks eventually swung upwards significantly, as the feared scenarios did not pan out as anticipated. Suttmeier suggests that we might witness a similar scenario unfolding this time.

He points out that the S&P 500 touched 4,213 before retreating into the 4,177 to 4,195 resistance zone last Friday. If the S&P 500 breaks out of this zone, it could trigger a FOMO rally, potentially reaching the August 2022 peak of 4,325, or even extending to the pattern count at 4,580.

Moreover, Suttmeier brings attention to a bearish head and shoulders pattern that seemed to be forming in the S&P 500 over the past few weeks. Interestingly, this pattern has failed, which could bode well for bullish investors. As Suttmeier aptly quotes the old market adage, “there is nothing more bullish than a failed head and shoulders top.”

So, while we’re in the midst of this seemingly unending wall of worry, perhaps it’s time to remember that markets have a penchant for surprising us—especially when least expected.