Time to Buy Stocks: Contrarian Signal Activated

by Warren Seah

According to Bank of America’s Chief Investment Strategist, Michael Hartnett, it’s time to put your fears aside and consider buying stocks. Hartnett’s team has identified a key indicator, known as the Bull & Bear Indicator, which has dropped to an “extreme bearish” level of 1.9, down from its previous reading of 2.2.

The team explains that the contrarian buy signal for riskier assets is triggered when the Bull & Bear Indicator falls below 2.0. This indicator has historically shown reliable patterns, reinforcing the team’s advice to investors.

Hartnett and his team highlight the recent outflows from emerging market debt, with a substantial $2.2 billion leaving the market in the latest week. This marks the 12th consecutive loss in this sector. Notably, high-yield bonds and global equity funds have also experienced withdrawals. Furthermore, fund manager cash levels have risen to 5.3%, signifying a cautious approach within the financial industry.

Bank of America’s weekly data reveals a striking record-breaking cash outflow of $108.9 billion. This year, some managers, including bond king Jeffrey Gundlach, have advised investors to hold cash, avoiding the complexities associated with predicting the impact of Federal Reserve policy on bonds and stocks. By investing in bank certificates of deposit (CDs) and Treasury securities, these managers have emphasized the safety of cash, with a potential yield of 5.5%.

To illustrate the trend away from money-market funds towards other cash options, Bank of America provides a helpful chart:

For investors who are heeding the call to buy stocks, Bank of America’s team provides a historical analysis of asset performance following the trigger of their buy signal. In the three months after the signal was activated, U.S. stocks demonstrated a 5.4% gain, while global stocks saw an impressive gain of 7.6%.

In conclusion, Bank of America’s research suggests that now is the time to consider purchasing stocks, as the Bull & Bear Indicator drops to “extreme bearish” levels. This contrarian signal has proved valuable in the past, and should be carefully considered by investors looking for potential gains in the market.

November’s Strong Performance in Stocks

November has historically been a favorable month for stocks, and experts believe this trend will continue. Rich Ross, Evercore ISI’s head of technical strategy, advises investors to consider buying equities, emphasizing that the market has not yet reached its peak for 2023.

The Nasdaq Composite has experienced an average gain of 6% during the November to January period, making it an attractive time for fund managers to invest in well-performing stocks. This strategy helps to bolster the appearance of their portfolios.

Despite some periods of selling over the summer, the S&P 500 and the Nasdaq Composite have performed well this year, with gains of 11% and 25% respectively.

However, there are potential risks that could halt the stock market rally. If the S&P 500 index fails to hold at 4,200, an important technical support level, there could be a credit event or hard landing. These terms refer to potential shocks or clear indicators of an upcoming recession.

Other factors that could disrupt the stock market rally include a rise in crude oil prices above $100 per barrel due to the ongoing Israel-Hamas conflict, which would threaten supplies in the Middle East. Additionally, if the 10-year Treasury yields surpass 5%, it would increase the cost of servicing the U.S. fiscal deficit.

In current trading, West Texas Intermediate crude oil for November delivery rose by $1.23, or 1.4%, to reach $90.66 per barrel on the New York Mercantile Exchange. This represents a weekly rise of 3.3%. At the same time, the yield on the 10-year Treasury fell by 3 basis points to 4.954%, after experiencing a surge of 8.5 basis points to 4.987% on Thursday, marking its highest close since July 20, 2007.

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