Emerging-Market Stock Fund Inflows Trigger Sell Signal: Technical Analysis

Emerging-market stocks are poised to fall after developing-nation equity funds had the second-biggest inflows this year, exceeding a level that preceded previous selloffs, according to BofA-Merrill Lynch Global Research.

Investors poured $3.2 billion into emerging-market funds in the past week, bringing four-week inflows to about 1.5 percent of their total assets under management, Michael Hartnett, BofA’s chief global equity strategist in New York, wrote in a report today, citing data from EPFR Global.

That triggered a sell signal from Hartnett’s fund flows “trading rule,” which says four-week inflows totaling at least 1.5 percent of assets under management may foreshadow market declines. The last sell signal on April 28 was followed by a 9.2 percent decline in the MSCI Emerging Markets Index the following month. Similar signals in April 2008, July 2007, September 2007 and April 2006 also predicted market drops within about four weeks, according to Hartnett.

“Today, compared to April, consensus is less bullish on the global economy and less positioned in global equity markets,” Hartnett wrote. “But the trading rule strongly predicts relative underperformance by emerging markets in August. We continue to predict medium-term outperformance by emerging-market equities.”

The MSCI emerging gauge has climbed 7.8 percent this month as European bank stress tests and U.S. earnings reports boosted investor confidence in the global economic recovery. The gauge declined 0.5 percent to 989.26 at 8:04 a.m. in New York, the first retreat in nine days.

Some strategists use fund inflows as a contrary indicator because they may signal investors with a positive view of the market have already purchased shares.

To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.