One of BofA's "Imminent Market Crash" Signals Was Just Triggered

Early last month, we showed that one of Bank of America's "guaranteed bear market" indicators, namely the three-month earnings estimate revision ratio (ERR) which since 1988 has had a 100% hit rate of predicting upcoming bear markets, was just triggered. As Bank of America explained at the time, "since 1986, a bear market has followed each time that the ERR rule has been triggered."

The only weakness of that particular signal is that while a bear market has always followed, the timing was unclear and the bear could arrive as late as two years after its was triggered.

Well, fast forward to today when overnight another proprietary "guaranteed bear market" indicator created by the Bank of America quants was just triggered.

As we explained earlier today, as part of the unprecedented, historic rush to dump cash and buy any risk assets that one can find, BofA's "Bull & Bear indicator" surged to 7.9 - effectively 8 - a level that is indicative of broad market euphoria, and the highest it has been since March of 2013, or nearly 5 years ago.

There is another, far more important, reason why the triggering of the Bull and Bear Indicator is a remarkable event: according to Bank of America back-tests, not only does this particular indicator also have a 100% hit rate once triggered...

... but on 11 out of 11 signals since 2002, the market dropped on average 12% after it was triggered.

And yes, it also works in the opposite direction: the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016. Since then the S&P has been up on 22 of the next 23 months.

Finally, and most importantly, unlike other "bear market" indicators which confirm if a crash is imminent but not when, this one gives an explicit time window: the market always dumps within the next 3 months once a Sell signal has been trigerred.

Here is BofA explanation:

BofAML Bull & Bear indicator surges to 7.9, highest since last sell signal >8 triggered Mar’13;

BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; average equity peak-to-trough drop following 3 months = 12% (backtested, Table 1); note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016

BofA's conclusion: "a tactical S&P500 pullback to 2686 in Feb/Mar now very likely."

As a result, buying some 3 month puts here is probably not a bad idea, especially after today's latest furious meltup which has made the cost of all downside protection virtually nil, and at this rate, delta hedgers may soon be giving away puts for free.


IH8OBAMA BennyBoy Fri, 01/26/2018 - 17:28 Permalink

So this BofA indicator has been curve fitted up to 2014 and now you expect us to believe it is infallible?  Really?

The buy signal it "generated" after the curve fitting was all over the place.  I guess that's why they don't overlay the S&P on the indicator chart so we can see for ourselves if it has any value.


In reply to by BennyBoy

uhland62 vato poco Fri, 01/26/2018 - 22:59 Permalink

It's all waffle and sound bytes.

Price/earning ratio is the only thing that counts. Should be around 14 - more for good stock, less for not so good stock. There will be a sugar hit through the tax cuts, so selling some with profit would be good. Then buy anything that earns on building to cash in on the insurance bonanza after the natural disasters. That bonanza should be over after two financial years - from start. Then sell because everybody will think the bonanza will keep going which it might if there are more natural disasters next year although at some stage insurance will become unaffordable and a natural disaster will no longer bring a bonanza. 

Don't buy infrastructure building stocks. Trump's plan so far looks like waffle and sound bytes.

In reply to by vato poco

luckylogger vato poco Sat, 01/27/2018 - 09:25 Permalink

I thought it was 44587637465 warnings of imminent crash.

Maybe it was 44, can't argue about a few.

You do not have to be the first one to make money in a crash.

From what I can see, it would be a good idea to let the other guy find the top.

Buy on days it is going up, buy when it is going sideways. Sell when it is going down but have a tight stop. The day will come when it is time to make lots of money being short. Today is not the day boys and girls.

In reply to by vato poco

Neighbour Throat-warbler… Fri, 01/26/2018 - 22:53 Permalink

The commenters full of sarcasm, funny thing, we are all commodities and will be free labor for the enemies without!

Video 8 years early but hey Hindsight is 2020  <-----get it?

On a lighter note and an empty or sell it does not matter, a nice song nevertheless!

In reply to by Throat-warbler…

Ajax-1 Accurite Fri, 01/26/2018 - 22:39 Permalink

I agree that Trump's economic policies have potential to MAGA. However, don't underestimate the sabotage capabilities of the Federal Reserve and their Globalist friends. We all know that economic fundamentals have been irrelevant for the past 8 years and they can implode this "stawk market/house of cards" at a time of their choosing.  I have personally made a shit load of money over the past 8 years due to unbridled money printing and QE scams. However, I am not naive enough to believe that it is based upon fundamentals or real price discovery. It's simply manipulation, accounting gimmicks and a game of the greater fool. The banksters and their Democrat friends know this and have no desire to MAGA or to lift up the economic prospects of the American people. They want to destroy America and transform it to little more than an economic trade zone via diminished sovereignty and a permanent economic underclass. They must destroy Trump in order to achieve their socialist dystopian dream. 

In reply to by Accurite