Sentiment on the brink of a ‘buy’ signal in oversold market

Stocks were technically oversold, and sentiment was on the brink of a “buy” signal last week, when at the same time there were weekly inflows into European, US and Japanese equities, according to flows data.

The Bank of America Merrill Lynch Bull & Bear Index was at 2.9 on Friday, a little above the “fear” threshold of 2, due to “capitulation out of lower-quality, higher-beta bonds.”

A 'buy' signal for stocks is near

Sentiment is on the brink of a ‘buy’ signal. Source: Bank of America Merrill Lynch

Looking strictly at capital flows in the week that ended on July 8, equities saw the largest inflows since December last year, worth $25.4 billion. Virtually all inflows came via exchange traded funds (ETFs).

Chinese stocks saw record inflows worth $13 billion, which were “perversely concentrated in local-listed A-share ETFs,” the report noted.

Last week, Chinese equities – which have lost a third of their value in a month after rallying by more than 100% in a year or so – gyrated wildly following Chinese government measures to prop up the stock market.

Among the latest measures were the threat to prosecute short sellers and forbidding shareholders who own more than 5% stakes to sell for six months.

Almost half of the stocks listed on the domestic stock markets were suspended from trading.

Foreign investors still do not have full access to the Chinese stock markets, although China has been liberalising its capital account slowly, gradually allowing foreigners to invest more in its markets.

Last week’s inflows into Chinese A-shares are not necessarily due to a revival of investors’ trust in the government’s measures, but “could signal market-support measures rather than private sector demand,” the Bank of America Merrill Lynch analysts said.

“Alternatively, big, counter-intuitive fund inflows at a time of Shanghai weakness could be due to share-creation to ‘short’ underlying assets,” they added.

US equities saw their largest inflows since March, worth $10.7 billion, with $6.7 billion via the SPDR S&P 500 ETF Trust (SPY).

European equities have seen inflows for eight weeks in a row, and last week they saw another $1.4 billion going in.

Japanese shares saw inflows in 19 out of the past 20 weeks, with $2.3 billion going in last week.

It wasn’t a good week for fixed income. Bonds suffered outflows worth $1.8 billion – it was their fifth straight week of outflows.

Investment grade bond funds saw outflows worth $900 million, while high-yield bond funds lost $1.1 billion in capital.

Municipal bond funds also saw modest outflows of $300 million, while bank loan funds saw $200 million leaving.

Emerging market debt funds saw their first inflows in seven weeks, worth about $100 billion.

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