recent price action for individual assets. However, the fact that we have had multiple signals across a range of sectors and macro prices is typically a warning that markets have moved too far too fast in a more general sense.
The last comparable episode was in early July in the wake of the Brexit sell-off. At that point Defensives were hitting record over bought signals with Financials and Cyclicals seeing the opposite. Against the backdrop of heightened uncertainty over the effects of Brexit the models provided a great signal to fade the violent rotation.
With these signals in mind we look for a period of consolidation in the rotation trade. The models are short term in nature and are not intended to identify strategic turning points — although like in the case of Brexit they do tend to emphasize when a crescendo is reached. While we would look for another potential leg in some of the reflation trades over the coming months we would prefer to wait for a pull back. The Basic Resources sector provides a useful example in how to use the models tactically. Three times this year prior to the current instance the sector has hit overbought levels on its relative CT| indicator. Previous pullbacks lasted 4-8 weeks and averaged -11% in relative performance terms.
Table 5: Composite Technical Indicators for sector relative returns (+100 max overbought; -100 max oversold}
Table 6: Bollinger scores —bond proxies 2.5-3.5SD oversold
52-week Z-Score
Since Oct 27 Recent 1m extreme Latest [Sector Latest MIN MAX Utiity 38 26 Healthcare a -98 ‘| Real Estate 34 -2.1 Personal & Household Goods 0 -94 0 Media 29 18 Food & Beverages -31 -93 0 Food & Bev 26 22 Telecom 2 92 0 HealthCare -25 -18 Utilities 8 -92 3 Telcos 2A 99 Technology 0 se 26 Travel & Leis 21 07 Media “| 87 7 Retail 15 0.4 Industrial Goods & Services 0 -13 35 Prs & HH Gds 42 06 Oil & Gas { AS 4 Autos 0.8 05 Autos 0 “12 8 Insurance 0.9 08 Chemicals 0 8 0 Technology 1.0 06 Travel & Leisure 0 -27 37 Banks 10 06 Financial Services -| 3 43 FinServ 10 06 Construction & Materials 0 -17 45 Industrials 15 14 Retail 0 -42 90 Oils 16 09 Insurance 36 0 94 Chemicals 19 08 Banks 16 8 94 Construction 2.0 12 Basic Resources 9 7 100 Basics 27 22
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 45: Basic Resources 4" overbought signal this year — previous pullbacks last 4-8 weeks and averaged -11% relative
Source: BofA Merrill Lynch Global Research, Bloomberg
Chart 46: Utilities near a record -4SD oversold vs 52-week average
100 80 60 40
1.2
1.1
1.0
; 0.9
} ==——=CTl relative —=———=Basics relative
12/15 0216 O46 0616 08/16 10/16
0.8
0.7
0.6
Source: BofA Merrill Lynch Global Research, Bloomberg
5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0
-4.0 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13
Utility - relative price vs 52wk average (SD)
Source: BofA Merrill Lynch Global Research, Bloomberg
; Bankof America 22 European Equity Strategy | 01 December 2016 Merrill Lynch
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