Stocks, U.S. Dollar Still Have Room To Rise, BofA Predicts

In a new report out this week, Bank of America analyst Michael Harnett discusses the current tumultuous environment for global markets. According to Harnett, there is both good news and bad news for investors, and Bank of America sees several ways to trade the chaos.

The good news
According to Harnett, there are three pieces of good news that have resulted from recent global market movements. First, almost every major global equity market recently fell below its 200-day and 50-day moving averages, which triggered a buy signal according to Bank of America’s Global Breadth Rule.

Second, fixed income markets have been strong in recent days, indicating that a global meltdown in stocks is unlikely.

Finally, global financial conditions (falling interest rates, low oil prices and a strong dollar) are favorable for growth and risk-taking and provide opportunities that Harnett believes will be too good to pass up for investors.

The bad news
Despite the positive indicators, Harnett also discussed three pieces of bad news for global markets. First, the staggering 32 percent 17-day decline in the Shanghai composite has eliminated $1.96 trillion in market cap and has raised global anxiety levels over how the China situation will play out.

Second, uncertainty over the outcome for Greece and the potential for Eurozone contagion also has investors spooked.

And third, the degree of levered speculation in global markets could be a cause for concern. “The risk remains that investors, in particular systematic macro funds, have crowded and levered positions that may need to be unwound should assumptions of a stronger dollar and lower bond yields fail to unfold,” Harnett explains.

Outlook
Bank of America believes that cyclical highs in both the U.S. dollar and stocks have not yet been reached. The firm remains long the dollar, long volatility, long stocks, short bonds and credit and selectively long in emerging markets and commodities.