The stock market could see a 10% correction before April amid exuberant positioning, but investors should use it as a buying opportunity, BofA says

• Stocks could correct as much as 10% before April, but investors should buy the dip, according to a Tuesday note from Bank of America.
• Exuberant positioning and the rise of speculative investments may spark the 'buyable' correction, BofA said.
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'Exuberant positioning" in the stock market could indicate a 10% correction is up ahead, but it will be a buying opportunity for investors, according to Bank of America analysts.

"We expect a buyable 5-10% Q1 correction as the big 'unknowns' coincide with exuberant positioning, record equity supply, and 'as good as it gets' earnings revisions," said a team of BofA strategists in a Tuesday note.

The S&P 500 has already gained 4% in 2021 as the market climbs to new highs. Amid the broad rally, investors desperate for more returns have been turning to more speculative investments like cryptocurrencies, SPACs, and crowd-sourced trading, said BofA.

The number of SPAC offerings in January alone exceeded the last six years combined, while the GameStop crowd-sourced short squeeze sent the stock up 2146% on an intraday basis, the firm said.

Read more: Ray Dalio says investors are staring down a period of weak returns as low rates inflate asset bubbles - and warns we're in the 'problem' part of the current cycle

Meanwhile, Bank of America's sell-side indicator is signaling that the stock market is on the verge of "dangerous optimism."

As these speculative investing methods combine with rising market exuberance, a correction of up to 10% may occur. But the strategists say the correction will be a "good buying opportunity."

It's a similar call to Jefferies' equity analysts who said on Monday they will be buying any dips if the market corrects.

Bank of America has a 2021 year-end price target of 3,800 for the S&P 500, a 2.8% decline from Tuesday's close.