Another stock market buy signal flashes as investors flee to ‘extreme bearish’ positioning

NYSE trader

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  • The inventory market simply flashed a contrarian purchase sign as traders flip extraordinarily bearish.

  • Financial institution of America highlighted that its proprietary Bull and Bear Indicator entered “Purchase” territory this week.

  • The inventory market has traditionally seen a median achieve of 5% after this purchase indicator flashed.

One other purchase sign simply flashed for the inventory market as investor positioning turns overly bearish in direction of equities, in accordance with a Thursday be aware from Financial institution of America.

The financial institution highlighted that its Bull and Bear Indicator simply entered “excessive bearish” territory, which represents a contrarian purchase sign for the inventory market. The final time this sign flashed was in Could 2022. This sign flashed only a few days after one other contrarian purchase sign flashed within the type of traders boosting their money allocation ranges.

The BofA Bull and Bear indicator is contrarian within the sense that it flashes a “purchase” sign when inventory market situations are extraordinarily bearish, and it flashes a “promote” sign when inventory market situations are extraordinarily bullish.

Elements that drove the sign into extraordinarily bearish territory over the previous week consists of fund outflows from rising market debt, excessive yield bonds, and international shares, in addition to a surge in money allocations amongst skilled traders on Wall Road.

“Positioning [is] now ‘excessive bearish’ …triggers contrarian ‘purchase sign’ for danger belongings,” Financial institution of America funding strategist Michael Hartnett mentioned.

This contrarian indicator has been fairly dependable over time. Since 2002, there have been 20 purchase sign occurrences, with the median three-month return after the sign flashed being 5.4% for US shares and seven.6% for international shares, in accordance with the be aware.

Bearish sentiment has grown in latest weeks as bond yields surged and inventory costs fell. The CNN Worry and Greed index has been in “Worry” territory because the begin of the month, and the AAII Investor Sentiment survey has seen bearish responses above its historic common over the previous 4 weeks.

“Traders [are] sufficiently bearish for 10-year yield at 5% ceiling,” Hartnett mentioned, including that the S&P 500’s key help degree of 4,200 ought to maintain within the short-term.

And if that degree does not maintain, its an indication that financial situations are deteriorating.

“If S&P 500 [support level] 4,200 cannot maintain with this degree of bearishness then there could also be imminent dangers of [a] credit score occasion/laborious touchdown,” Hartnett mentioned.

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