BofA: Negative divergences are a tactical risk for US equities

Bank of America analysts warned of "tactical divergences" that could dampen the positive summer seasonality typically expected for the S&P 500.

"The SPX achieved a new all-time high last week, but the advance-decline (A-D) line, 5-day put/call ratio, the US high yield OAS, the Corporate BAA spread, and new 52-week highs did not confirm this new high on the SPX," states the BofA note.

These divergences are seen as a potential risk for US equities in June, with support levels for the SPX identified at 5191 and 5000-4953.

BofA highlights a concerning decline in new 52-week highs on the SPX. "The percentage of SPX stocks reaching new 52-week highs shows a late-March into June bearish divergence," the report says.

While the number of new lows remains contained, BofA identifies a potential escalation point: "If the percentage of stocks at new 52-week lows moves above the 2.19-3.18% range that has held on tactical dips since early November 2023, the risk for a deeper correction would increase."

In addition, BofA says that while major indexes like the SPX and NASDAQ 100 reached new highs, others like the NYSE and Russell 2000 have lagged behind.

The BofA note also highlights the continued risk aversion among retail investors, evidenced by record highs in cash holdings through money market funds. "Retail money market funds (MMF) total net assets reached a record high of $2.45 trillion last week," BofA states. This suggests investors remain cautious.

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