Significant inflows into High Yields and equities have triggered a contrarian sell signal on BofA Merrill Lynch Global Research’s flow trading rule.
According to BofA Merrill Lynch Global Research the rule is based on the idea that tracking both global equity and High Yield bond fund flows should offer a more representative gauge of investor risk appetite. When flows into global equity and HY bond funds become overly bullish, especially against a backdrop of weaker global PMI, risk assets become vulnerable to short-term tactical pullbacks.
The rule has given 13 sell signals since 2001 (excluding the current signal), preceding a median selloff of 2.3% over the next four weeks with a 77% hit rate. Equities underperformed US Treasury Bonds by as much as 330bps over the same period.
Michael Hartnett, Chief Investment Strategist at BofA Merrill Lynch Global Research, says that the rule currently recommends taking profits rather than outright shorts as the US ISM is currently improving, not deteriorating.