Uncertainty about the outcome of the Brexit negotiations has hit new highs, President Trump seems determined to scare the markets witless with his threats of escalating the trade war, debt problems in China are accelerating – the perfect background for a contrarian ‘buy’ signal.
Last week, investors yet again favoured bonds over any other asset class, despite central banks cooing dovish everywhere.
The Fed is cutting rates? No worries, buy bonds. The European Central Bank prepares to push rates even further into negative territory? Bonds are the ticket. The Bank of England gets the printing press ready again? Oh yes, some bonds would be great.
It finally happened: investors are so bearish that a contrarian “buy” signal has been triggered. The Bull and Bear indicator developed by researchers at Bank of America Merrill Lynch is finally indicating Buy, one year after climbing so high that it triggered a Sell signal.
If this is not yet capitulation, it sure feels like it. Money has been fleeing stock markets at record speed, and despite dovish signals from the Federal Reserve, investors are still not taking advantage of the buying opportunities the panic in the markets are throwing at them.
There have been “massive” outflows from capital markets in the past week, but although they brought Bank of America Merrill Lynch’s “bull and bear” indicator close to the “buy” signal, they haven’t managed to trigger it.
Investors’ optimism remained at very high levels, despite the beginning of tapering of quantitative easing by the European Central Bank (ECB), tensions with North Korea and the Catalan crisis.
Last week was a feast of records for Wall Street: the S&P 500 recorded six consecutive highs, something not seen for two decades. The streak only ended after a jobs report that showed the first negative reading in seven years, skewed by the hurricanes that hit the U.S. in September.
The contrarian “buy” signals in the markets keep increasing, but this doesn’t mean investors will rush and buy like in the good times.
Global stock markets serve as a brutal reminder that nothing can ever be taken for granted when investing.
After the carnage in the stock markets — it was the worst start of the year ever for U.S. stock markets — a look at capital flows can give some clues on where the markets might be headed next.