Bear Rally Now 'Imminent' Says BofA's Hartnett but Warns Ultimate Lows Yet to Be Reached

May 17, 2022 6:50 AM EDT
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All signs point toward a bear market rally in the near term, says Bank of America’s Chief Investment Strategist Michael Hartnett.

Results of the bank’s Global Fund Manager Survey (FMS) are “extremely bearish” with the highest cash levels since 9/11, biggest tech "short" since August 2006, and biggest equity Underweight since May 2020. Moreover, BofA Bull & Bear Indicator is at 2.0, which is a contrarian buy level.

The list goes on and on. Global growth optimism is at an all-time low while the fear of stagflation is at the highest since GFC. Ultimately, these factors have resulted in fund managers pushing CEOs to improve balance sheets and not spend capex or buybacks, adds Hartnett.

“68% expect inflation rates to drop coming quarters, fewer and fewer (net 34%) expect bond yields to rise, but big difference with prior “big lows” Is 78% expect short rates to rise; FMS Fed "put" is 3529 on S&P500 (-12% from current levels),” the strategist wrote in a client note.

When it comes to risks, the No.1 tail risk is hawkish central banks, ahead of recession, inflation, and geopolitical risks.

“Investors are very long cash, commodities, healthcare, staples, and very short tech, equities, Europe, EM; allocation to tech lowest since Aug’06, to defensives on par with GFC, Euro-crisis, COVID-crisis levels, allocation to stocks lowest since May’20 (but not as low as prior crisis levels),” Hartnett added.

His colleague Stephen Suttmeier, the Chief Technical Strategist at Bank of America, added that technical indicators point to a bounce in equities.

“The S&P 500 (SPX) has dropped in each of the last six weeks. Under this scenario, the next week tends to be strong with the SPX up 81% of the time on an average return of 0.94% (1.51% median). This bodes well on a tactical basis after the Friday’s (5/13) 90% up day… Demark indicators generated bullish daily 13 downside exhaustion signals near supports on the SPX, NDX and RTY last week. These signals confirm the potential for rebounds from tactically oversold levels. The 3-month VIX vs VIX, 5-day put/call and percentage of stocks above 10-day MAs did not confirm last week’s lower lows for the key equity indices. These positive divergences also support the case for a tactical rally,” Suttmeier wrote in a separate note.

When it comes to Bank of America equity client flow trends, the last week witnessed the biggest retail outflows in a year. On the other hand, hedge funds and corporate clients were buying stocks.

“Retail and institutional clients were net sellers (for first time in 4 weeks and for the second week, respectively). Sales by retail were the largest in a year and the 12th largest in our data history (since ‘08). While our work suggests that retail flows have been positively correlated with subsequent near-term market returns (retail is not a contrary indicator-note), weeks of similarly or more extreme retail outflows have been followed by positive 4-week S&P 500 returns >90% of the time (vs. positive 4- week returns for the index 64% of the time over same period since ‘08),” strategist Jill Carey Hall told clients in a memo.

By Senad Karaahmetovic

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