Extreme fear leads to record outflows from equities

An indicator of investor sentiment has fallen to extreme fear levels, after sinking deeper into bearish territory in previous weeks.

Bank of America Merrill Lynch’s bull/bear index shows a reading of just 0.5 on a scale from 0, indicating extreme bearishness, to 10 indicating extreme bullishness.

Extreme fear in bull/bear indicator

Extreme fear takes hold of the stock market. Source: Bank of America Merrill Lynch.

Last Tuesday saw “massive” redemptions from equity funds, worth $19 billion, the second largest since 2007, the data show.

For the whole week, equities posted the largest outflows on record, of $29.5 billion, prompting the Bank of America Merrill Lynch to talk about “investor capitulation.”

Emerging market equities saw the largest outflows since January 2008 in the week that ended on August 26: $10.5 billion left the asset class.

Four-week outflows were a “huge” $22 billion, or 2.5% of total assets under management, very close to the first contrarian “buy” signal for emerging market stocks since June 2013, according to the analysts.

A contrarian “buy” signal for emerging markets equities would be triggered if the asset class sees further outflows worth between $5 billion and $6 billion.

US stocks saw their biggest outflows in 16 weeks, with $12.3 billion leaving, while European stocks saw their first outflows in 15 weeks and the largest since October 2014, of $3.6 billion.

Japanese equities bucked the trend, with $3.3 billion in inflows. Japanese stocks have seen inflows in 25 of the past 27 weeks.

Looking at sectors, healthcare saw most funds going out, about $2.5 billion, followed by technology with $1.4 billion and the consumer sector with $1.2 billion worth of outflows.

Looking at fixed income, high yield bond funds saw their largest outflows this year, of $4.9 billion, while emerging market debt funds saw their biggest outflows since the June 2013 “taper tantrum”: $4.2 billion.

Investment grade bonds also saw their largest outflows since June 2013, losing $3.8 billion last week, while the safe government/treasury funds bucked the trend, with $1.7 billion of inflows.

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