The Global Breadth Rule has triggered a buy signal for global equity markets, according to Bank of America Merrill Lynch’s recent global strategy report.

Global Breadth Rule

Global Breadth Rule – Markets Now In Oversold Position

With 43 out of 45 markets now in ‘oversold’ position, Bank of America Merrill Lynch analysts feel BofAML Global Breadth Rule has triggered a contrarian buy signal for global equity markets.

Michael Hartnett and team feel global equity markets are oversold by breaching the 200 DMA and 50 DMA triggers.

According to the strategists, the BofAML Global Breadth Rule quantifies the extent to which global equity markets are overbought or oversold and whether any marginal sellers are waiting in the sidelines.

Michael Hartnett, the firm’s chief investment strategist feels historically this breath buy signal tends to be followed by 6 percent to 7 percent gains in subsequent 4 to 6 weeks.

Markets and Policy Makers Take Contrarian Position

The strategists feel the rule is contrarian and argues solely from a short-term perspective. The analysts feel a sustained rally would normally require policy changes to force a shift in investor behavior.

The analysts caution that the Breath Rule has failed once in July 2008 when de-leveraging across asset classes caused a meltdown in equity markets. Besides, a further unwind of jam-packed bond positions in coming weeks could be a potential risk for the equity markets.

The analysts also feel the two markets that are not currently in buy territory are the two largest markets viz.: U.S. and Japan.

China is One of the Most Oversold Global Equity Markets

Michael Hartnett feels China is one of the most oversold markets. The following table depicts the most oversold markets and sectors:

Most oversold markets and sectors

The strategists feel Japan, Health Care, Consumer Discretionary and the U.S. top the list of least oversold markets and sectors, as evidenced from the following table:

Least oversold markets and sectors

In their global equity strategy report, Bank of America Merrill Lynch strategists have also back-tested their model prior to the inception date as if the model had been in existence. By considering various trigger dates since 2001 till 2012, the analysts have found the hit ratio of the Breath Rule and ACWI performance has thrown a buy signal.

H/T Barbara Kollmeyer