In the week through Thursday, the S&P 500 shed 6% in its longest streak of losses since the days leading up to the November 2016 election. The tech-heavy Nasdaq lost the most with a 7% drop.
It's still anyone's guess whether the worst of the selling is over for now. Over at Bank of America Merrill Lynch, Michael Hartnett, the chief investment strategist, isn't advising clients to rush all-in and buy the dip.
One reason is the bank's Bull & Bear indicator. It's a contrarian indicator, meaning that it triggers a buy signal when it swings into "extreme bearish" territory. When stocks surged at the beginning of 2018, the indicator veered into "extreme bullish" territory, triggering a sell signal that foretold the correction.
The indicator fell to 3.3 this week, in bearish but not the "extreme bearish" territory that would be a buy signal.
"Hedge fund/CTA capitulation in risk assets needed to stab Bull & Bear indicator below 2.0 i.e. into buy risk assets for next 3 months zone," Hartnett said.
To that end, he remained "fundamentally bearish" on two factors that have been touted as the drivers of this sell-off: peaking earnings growth and monetary policy tightening from the Federal Reserve.
"Watch homebuilders (the "tell" in recent months)/REITS/utilities for signs of peak yields," Hartnett said. "We respect technicals and seasonality but will sell the rally."
He further laid out seven ways to play out this idea:
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