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A contrarian 'buy signal' for stocks has been triggered after waves of selling

Key Points
  • Bank of America Merrill Lynch said in a research note Friday that its flagship sentiment indicator had tumbled from 2.4 to 1.3 and triggered a contrarian "buy signal" for risk assets.
  • A reading below 2 on its "bull and bear indicator" is classed as extremely bearish and causes the buy signal to flash.
  • The bank said this week's drop had been due to outflows in emerging market debt and equities, as well as a rapid rally in Treasury markets.
Traders work on the floor at the New York Stock Exchange.
Eduardo Munoz | Reuters

A contrarian "buy signal" for risk assets, like equities, has been activated for the first time since January this year.

Bank of America Merrill Lynch said in a research note Friday that its flagship sentiment indicator had tumbled from 2.4 to 1.3 and triggered a contrarian "buy signal" for risk assets — the first buy signal since January 3.

A reading below 2 on its "bull and bear indicator" is classed as extremely bearish and causes the buy signal to flash. The bank said this week's drop had been due to outflows in emerging market debt and equities, as well as a rapid rally in Treasury markets.

Bank of America Merrill Lynch, using fund flow data from EPFR, said another $12.4 billion of cash flowed into bond funds and $1.9 billion into gold in the week ending Wednesday. Meanwhile, $7.6 billion in cash left equities which took the year-to-date outflow total to $204 billion.

The S&P 500, which is still up 16% this year, saw some heavy bouts of selling at the end of last week as the U.S.-China trade war escalated further. President Donald Trump threatened to raise duties on $250 billion in Chinese goods to 30% from 25% and increase tariffs on another $300 billion in products to 15% from 10%, in response to Chinese retaliation. The move on Friday caused the S&P 500 to shed 2.6% for the session.

But softer words from both sides has already meant investors are shifting back to stocks since Wednesday. The U.S. benchmark rose 1.3% Thursday after Beijing said it wished to resolve its protracted trade dispute with Washington with a "calm" attitude.

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