Why Bank of America Merrill Lynch Is Going “All-In” On Stocks

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Even after a big trading session yesterday, another “buy signal” has appeared according to Bank of America Merrill Lynch (BAML).

No, it wasn’t hiding in an obscure economic index. And no, it’s not reflected in a technical indicator found on the charts.

Instead, BAML says that their proprietary sentiment indicator just dropped into highly bearish territory. Falling from 2.4 to 1.3, it’s the first time their sentiment gauge has been this low since January 3rd. To company analysts, that means it could be time to go all-in on equities.

Using fund flow data from EPFR, Bank of America Merrill Lynch calculated their sentiment indicator by looking at outflows in emerging market debt and equities, as well as the recent spike in Treasurys.

The company found that $12.4 billion flowed into bond funds and $1.9 billion into gold as of the current week (ending Wednesday), while $7.6 billion left equities.

Taking the total year-to-date equity outflow to $204 billion.

To BAML, that’s reason to believe the market is woefully oversold and equally ripe for the picking. Especially with trade war tensions cooling and a slew of impressive early corporate earnings already released.

A huge wave of pessimism sent the sentiment indicator tumbling on Friday last week. The S&P 500 dropped 2.59% in what was an all-around terrible day for bulls as trade war tensions hit a fever pitch.

But today, things are starting to change. The major indexes all opened higher this morning as momentum from yesterday’s surge carried over.

More importantly, though, the market set a new a 25-day high early in the trading session before dropping. It’s the highest equities have been since the major dip on August 3rd, and if stocks can go higher, an upside breakout would be within reach.

The BAML sentiment indicator is up since Wednesday as a result, further confirming to company analysts that their gauge is working as intended.

Because a breakout past the post-August correction highs could put bulls back in the driver’s seat and BAML’s indicator into bullish territory.

However, that’s not say that this morning’s gains will stick. The U.S. Consumer Sentiment Index (CSI) – calculated by the University of Michigan – came in lower than economist estimates, clocking in at 89.8 vs. an expected 92.1 for the month of August.

The CSI, compared to the Consumer Confidence Index (CCI), is viewed by many analysts as the less important of the two. The CSI is more heavily weighted towards stock market performance, while the CCI is driven purely by employment statistics, business conditions, and family incomes.

In general, if the market’s had a bad run, the CSI will reflect that in its final score. For whatever reason, analysts seem to always overestimate the CSI reading after an equity correction. This time is no different in that regard.

Still, though, nobody wants to see a lower than expected CSI. Especially with a potential market-wide rally at play.

Thankfully for bulls, though, stocks appear to have too much momentum for a disappointing CSI reading to spoil the party.

­Investors are done selling, it seems, and if the market can make today’s gains stick, next week could mark the beginning of a historic rally.

One that comes right after yet another trade war-driven correction, and right on schedule for investors to repeat the whole process two months from now.

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