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This stock-market indicator produced a ‘timely’ buy signal in March, and now its message is: Sell

MarketWatch logo MarketWatch 8/11/2020 Callum Keown
U.S. stocks pointed higher early on Monday, despite rising tensions between the U.S. and China. © Getty Images U.S. stocks pointed higher early on Monday, despite rising tensions between the U.S. and China.

A market indicator that raised a ‘timely’ buy signal for stocks in March is now giving a sell signal for the first time since January 2018.

Morgan Stanley said its combined market timing indicator (CMTI), which factors in equity valuations, fundamentals and risk, was now giving a sell signal.

The indicator gave a “timely buy signal” in early March and remained in buy territory until mid-June, the U.S. investment bank’s strategists said. The Dow Jones Industrial Average (DJIA)  and the S&P 500 (SPX)  subsequently recovered from March lows along with the Nasdaq Composite (COMP) , which hit record highs above 11,000 last week.

Improved earnings revisions and mutual fund flows turning “less negative” in the past two weeks has led to the CMTI now producing a sell signal, the strategists said.

“With global markets appearing tactically stretched, a sell signal on our market timing indicator would certainly add to the notion that upside on markets may be capped near term,” they said in a note. Historically, after a sell signal, European stocks have fallen 3% over the subsequent six months.

The bank’s equity strategist also said the U.S. dollar was the most oversold in 40 years, noting that its macro strategists have turned tactically neutral on the currency from a bearish stance last week. The DXY (DXY) index was trading 3.6 standard deviations below its twelvemonth average as of Friday, the most oversold level since 1978, they said.

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