A contrarian 'buy signal' for stocks has been triggered, as investors flee cash, says Bank of America

By Barbara Kollmeyer

Swallow your fears because it's time to buy stocks.

That's according to a team led by Michael Hartnett, Bank of America's chief investment strategist, who said their Bull & Bear Indicator is now in "extreme bearish" territory at 1.9 from a previous 2.2.

The contrarian buy signal for riskier assets is triggered when the Bull & Bear Indicator drops under 2.0, as shown by their indicator:

Hartnett and the team said that buy signal comes amid outflows from emerging market debt -- $2.2 billion flowed out in the latest week, the 12th consecutive straight loss they noted. Investor money has also been yanked from high-yield bonds and global equity funds, while fund manager cash levels have risen to 5.3%.

Bank of America's latest weekly data showed the largest weekly outflow of cash on record, of $108.9 billion. Investing in cash has been popular advice among some managers this year, such as bond king Jeffrey Gundlach. The suggestion had been that investors can sidestep the game of guessing the impact of Federal Reserve policy on bonds and stocks and find safety with a 5.5% yield on cash through via bank CDs and Treasury securities.

Here's their chart on the exodus from money-market funds, which invest in those cash options:

As for investors who are heeding the call to buy stocks, they laid out how assets have performed since 2002 in the following three months after their signal was triggered, such as a 5.4% gain for U.S. stocks and a 7.6% gain for global stocks:

November has traditionally been one of the strongest months for stocks. Evercore ISI's head of technical strategy, Rich Ross, was also heard encouraging investors to buy equities earlier this week, as he argues the "high" for 2023 is not in yet.

He notes the November to January period has seen a 6% gain on average for the Nasdaq Composite. The tail end of the year often sees fund managers invest in stocks that have performed well to improve the look of their portfolios.

The S&P 500 SPX is up 11% so far this year, with the Nasdaq Composite up 25%, despite bouts of selling that began in the summer.

Hartnett added that if the S&P 500 index can't hold 4,200, an important technical support level, "then there may be imminent risks of a credit event/hard landing," referring to potential shocks or solid signs of a recession.

Other shocks that could stop a stock market rally include crude oil hitting more than $100 a barrel as the Israel-Hamas war reaches its second week, threatening Middle East supplies, as would the 10-year Treasury yields heading over 5%, raising the cost of servicing the U.S. fiscal deficit.

West Texas Intermediate crude oil for November delivery (CL.1) (CLX23) rose $1.23, or 1.4%, to $90.66 a barrel on the New York Mercantile Exchange, on track for a 3.3% weekly rise. The yield on the 10-year Treasury BX:TMUBMUSD10Y fell 3 basis points to 4.954%. On Thursday, the yield surged 8.5 basis points to 4.987%, the highest close since July 20, 2007.

-Barbara Kollmeyer

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10-20-23 0930ET

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