Market Gloom Triggers BofA’s Contrarian ‘Buy Signal’ for Stocks

(Bloomberg) — Bank of America Corp.’s indicator is flashing green for the first time since the onset of the pandemic in March 2020, potentially signaling an upside for global equities in the weeks ahead.

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“There have been eight contrarian ‘buy signals’ since 2013,” BofA strategists led by Michael Hartnett wrote in a note to clients. “Back-testing shows that in the 12 weeks following buy signals, global equities have risen 8%” and outperformed investment grade bonds, they said.

The signal was triggered by poor investor sentiment, and BofA’s own global survey showed that fund managers are allocating more than 5% of their assets into cash. A surge in outflows from equities and high yield credit also indicates it’s time to buy, according to the note.

While stock markets in Europe and the U.S. have recovered the losses incurred since the start of Russia’s invasion of Ukraine, major equity indexes are still in the red for the year, amid concerns that surging inflation and higher interest rates will damp economic growth, and weigh on corporate profits. Equity strategists are split on whether the recent rebound has legs, or the rally should be sold.

BofA’s team is squarely in the bears’ camp, expecting the “shock” of record inflation readings to be followed by a shock of rate hikes and eventually a growth shock. While “the strong rip of March can continue further to test highs,” this only means that a “strong selling opportunity awaits” in the second quarter of this year, the strategists said on Thursday.

They are not alone in their skepticism.

“The clients we met were looking to sell the rally, rather than chasing it,” Barclays strategists led by Emmanuel Cau wrote in a note on Friday, after meetings in the U.S., Europe and the Middle East. “So further upside seems to be the pain trade.”