BAML: Buy the dip

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  • The US S&P 500 index has slumped over 6% since early October.
  • Bank of America Merrill Lynch’s (BAML) Global Investment Strategy team says it should be seen as a buying opportunity for investors.
  • It expects a strong year-end rally based on historic patterns, few signs of financial stress and a variety of contrarian indicators.

The recent slide in US stocks should be seen as a buying opportunity for investors, says Bank of America Merrill Lynch’s (BAML) Global Investment Strategy team.

In its opinion, rather than marking the start of a prolonged downturn, the S&P 500 is likely to rally hard into year-end.

“We believe this is a normal consolidation of the recent highs in the markets,” BAML says, referring to the 6% plus drop in the index from record highs struck in late September.

“The market should begin to build a base that may need testing creating an important entry level for investors. History shows that after mid-term elections markets tend to rally into year-end.”

Along with history as a guide, BAML says there are a variety of indicators out there that bode well for year-end rally, including the one below.

It looks at the five-day moving average of intraday movements in the US equity put/call ratio, an indicator that measures how many put options are being traded relative to call options to gauge investor mood.

BAML

The current ratio sits at the highest level since early February, the last period of heightened volatility seen in US stocks. In the past, a move of this magnitude has often been followed by a rebound in stocks as the annotations suggest.

Think Brexit, the China-led wobbles at the start of 2016, along with the 2016 US Presidential election.

“The indicator shows that the market has becoming too bearish in buying more puts than calls, and current readings are nearing historically good buying opportunities,” BAML says.

It also notes the proportion of global stock markets trading below both their 50 and 200-day moving average has now hit 90%, triggering a contrarian buy signal for stocks.

“[This] suggests markets are very oversold,” BAML says.

As such, it sees US stocks not only rebounding but hitting fresh record highs.

“Our BAML US Equity and Quantitative Strategist, Savita Subramanian, maintains her 3000 target on the S&P 500,” it says.

“We continue to focus on large-cap quality stocks that are cash rich.”

The S&P 500 currently trades 2,750.79.

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