Sell signal still flashing despite the stock market correction

The past week has not been encouraging for investors, with many asset classes haemorrhaging funds at increased speed.

The week before that, on January 30, the Bank of America Merrill Lynch’s Bull/Bear indicator triggered a sell signal for the first time in five years, and markets sold off.

Sifting through the rubble of last week in the stock markets, we see that US stocks had record redemptions worth $33 billion, according to data analysed by Bank of America Merrill Lynch, whereas European equities saw their biggest outflows in 79 weeks, worth $3.3 billion.

Money poured out of emerging markets as well, to the tune of $2.4 billion. By contrast Japan, famous for its deflation and its asset-buying central bank, saw the strongest inflows in 65 weeks, managing to attract exactly the amount emerging markets saw pouring out: $2.4 billion.

Looking at sectors, health care saw its highest outflow since February 2015, worth $1.4 billion, while technology saw $1.2 billion worth of redemptions, the highest since August 2015. Materials, financials and real estate also saw withdrawals.

Interestingly, energy, utilities and consumer stocks saw inflows. It is a bit difficult to pin down a reason for this. Utilities and energy are sectors that attract those who fear inflationary pressures, but the consumer sector would definitely send those investors running.

Turning to fixed income, investment grade bond funds continued to attract money, and with $6.2 billion going in have seen their 59th straight week of inflows. By contrast, high yield bonds saw $5.3 billion going out, and there were modest outflows from municipal bond funds as well.

Investors kept pouring money into Treasury Inflation Protected Securities (TIPS), which saw another $900 million going in, making this the fourth week in a row in which these bonds were bought.

Judging by these flows, investors are confused about the inflation outlook when it comes to fixed income, as well: why would they buy investment grade bonds, if they believe inflation will rise as suggested by the inflows to TIPS?

What about the Bull/Bear Indicator? Remarkably, it is still in Sell territory. It came down only a notch last week, to 8.5 from the previous 8.6:

Bull Bear Indicator

The Bull/Bear Indicator is still showing a sell signal.

For the moment, the current situation amounts to a staring contest between the markets and the Fed. Whoever blinks first will win.

The BofAML analysts remind us that “markets stop panicking when central banks start panicking”, noting that the late-cycle crashes or corrections in 1987, 1998, 2016 were “all arrested by policy actions.” Let’s see if and when the Fed blinks, then.

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