Around the world, stock markets have faltered over the past month as fears that the Federal Reserve will taper back quantitative easing sooner than expected have crept into the global marketplace.
BofA Merrill Lynch Chief Investment Strategist Michael Hartnett says at this point, the sell-off looks overdone.
In a note to clients titled " Equity Buy Signal Triggered," Hartnett says nearly every major stock market – with the exception of those in the U.S. and Japan – is now oversold:
Contrarian “Breadth” Rule Triggers Buy Signal
BofAML Global Breadth Rule triggers contrarian “buy” signal for global equities. 43 out of 45 markets now “oversold”, i.e. trading below [their 200-day and 50-day moving averages]. Historically, “buy” signal followed by 6-7% gains in subsequent 4-6 weeks. Last buy signal on 6/1/12 nailed the low (stocks then rallied 30% trough-to-peak).
Markets Stop Panicking when Policy Makers Start Panicking
The rule is contrarian and argues solely for a short-term bounce in equities. A sustained rally normally requires policy changes to force shift in investor behavior. Two further caveats: Breadth Rule failed once, in July 2008, when deleveraging across asset classes caused meltdown in equity markets; the two markets that are not currently in buy territory are the two largest, US & Japan.
What is most oversold?
Trading contrarians looking for long opportunities should note most oversold markets and sectors are all China & carry-trade related: Brazil, Turkey, South Africa, Mexico and Materials. Note our EM Flow Trading Rule is very close to a “buy” signal. Least oversold: Japan, Health Care, Consumer Discretionary & the US.
The chart below shows previous performance of the Global Breadth Rule.
BofA Merrill Lynch Global Investment Strategy, MSCI
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