More Overbought Warnings From Bank Of America

Just as BoAML strategist Michael Hartnett trumpeted his Great Rotation into equities investment theme which postulated that under-invested individuals and institutions would rotate from bonds into stocks, his colleague FX strategist Richard Cochinos made a tactical call against the risk-on trade (via Business Insider):

"Bottom line," Cochinos writes, "Several indicators are calling for a risk correction. USD selling has reached previous reversion levels and greater buy-backs are to come."

Cochinos first points to U.S. dollar selling by "real money" investors (i.e., pension funds, mutual funds, insurance companies, et al.), which has reached extreme levels recently – 1.8 standard deviations from the mean, to be exact.

Cochinos believes that the US dollar is highly oversold and due for a reversal - and a USD rally would typically coincide with a risk-off environment.

In addition, he believes that equity flows are exhibiting overbought conditions:



Some of the analysis of Chief US technical analyst Mary Ann Bartels is also showing highly overbought conditions as well. The latest readings of her industry level overbought/oversold model is showing 16 overbought and 3 oversold industries for a ratio of over 5 to 1 - a highly extended condition [annotations in red are mine].


I don't want to put word in Mary Ann's mouth as she remains bullish and the title of her latest weekly commentary reads "Good earnings and liquidity power the markets higher". However, the industry level overbought/oversold model is one that I am very familiar with as I was once personally involved in producing that report on a weekly basis.

My own interpretation is that, despite the powerful positive momentum exhibited by stocks, these are conditions that usually precede corrections.

Disclosure: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.