BofA is a 'Patient Bear' Despite Flows Suggesting This is More Than a Bear Market Rally

August 16, 2022 7:26 AM EDT
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Last week, the Bank of America clients were net buyers of U.S. stocks for the seventh consecutive week with inflows recorded at $3.2 billion, according to strategist Jill Carey Hall.

Institutional clients led the buying activity for the third consecutive week while hedge funds returned to the long side after selling in the previous week. Interestingly, retail clients were selling last week, which marks the first week of going short in almost 2 months.

“Clients bought stocks in six of the 11 sectors, led by Tech (seventh largest weekly Tech inflow in our data history since ’08) and Consumer Discretionary (largest weekly inflow in our data history). Consumer Discretionary is typically an early-cycle sector that outperforms during Fed easing cycles, though outperformance for consumer services stocks often begins earlier,” Carey Hall said in a note.

Clients have continued to dump defensive sectors, like Health Care and Consumer Staples, with Staples outflows the sixth-largest since 2008. Elsewhere, clients have bought Energy stocks while Industrials recorded the fourth consecutive week of selling.

For Carey Hall, these flows suggest investors believe the ongoing rally is more the beginning of an early cycle than just a bear market rally.

Bank of America’s Global Fund Manager Survey (FMS) for August also showed that sentiment remains bearish, “but no longer apocalyptically bearish as hopes rise that inflation & rates shocks end in coming quarters.”

“BofA Bull & Bear Indicator stays at “max bearish” 0 = no immediate reversal of bear rally; but we remain patient bears, would fade SPX >4328 as rates up-profits down our base case,” Chief Investment Strategist Michael Hartnett wrote in a client note.

Equity allocations are on the rise from “dire” July lows as investors expect lower inflation in the next 12 months. This is also reflected in the cash levels, which fell to 5.7% from 6.1% in July.

“FMS positioning still “long stagflation” (commodities, cash, defensives), “short Goldilocks” (EU/EM stocks, consumer); but big Aug rotation to US stocks/tech/consumer, out of staples/utilities/UK,” Hartnett added.

More importantly, the survey showed that “notable FMS investors” expect growth stocks to outperform value in the next 12 months.

By Senad Karaahmetovic

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