Investing is simple enough: You buy stocks when they’re at low prices and sell them when they’re at high prices. Stocks are hitting record highs right now, and although there are few signals of trouble ahead (except maybe China) investors would make out handsomely if they sold down their holdings right now and went on holiday.
Here’s how that looks in terms of the S&P 500, charted back to the dot com crash in 1999-2002:
But Bank of American Merril Lynch analyst Michael Hartnett and his team say the indicators they follow show that the markets are mostly screaming “buy!”
In a note to investors last night, BAML’s team argues that of five major “fear and greed” signals it follows, three are flashing “buy,” a fourth is close to that point, and only the fifth is bearish.
BAML’s note is dense with data, so here are highlights from just a few points.
Global equity markets fall below their 200- & 50-day moving averages:
This survey of investors shows they’re holding an unusual amount of cash, over 5.5%, on the sidelines:
Lastly, BAML notes that there is a historic correlation between investor cash balances and their appetite for risk. But recently, that correlation has fallen apart, and now investors have a high appetite for risk and high cash balances — a perfect scenario if you believe that a bunch of equity-buying is about to happen:
So, if markets are unusually weak and it looks like a big chunk of money is about to be invested in stocks, it’s a good time to put your cash in before all that expected stock market investment pushes up prices.
The only indicator flashing “sell” is the flow of money into emerging market (EM) assets, BAML says. Flows into China’s stock bubble have pushed the EM indicator up into “sell” territory.