While a week ago, both Goldman and BofA noted that investor euphoria was quick to rebound from the February “Quant Qrash” doldrums, in his latest Flow Show report, BofA CIO Michael Hartnett finds that the scramble to rush into risk assets has moderated over the past week, and BofA’s proprietary Bull & Bear Indicator has pulled back modestly, to 7.6 from 8.1 “driven by High Yield bond outflows, less frothy equity & credit technicals.” Hartnett also notes that during the 3 weeks this indicator was in the “extreme bull” zone. (i.e. >8) global stocks tumbled -9.0% peak-to-trough, meaning the indicators’ “sell” hit ratio is now a perfect 12/12.
And while the flush may have already taken place, there is one residual concern: on 8/11 occasions when the indicator fell back below 8, global stocks saw further losses next 3 months (median = 3.2%)
Incidentally, that’s the bullish side of the latest note from Hartnett. More notable, and as a far bigger threat, the BofA Chief Investment Strategist lays out 6 reasons why he believes that another $6 trillion correction may have begun. First, why $6 trillion? That’s how much market cap global equity market cap lost in the February 10% drawdown(to $80.6tn); if Hartnett is right, a fresh $6tn correction implies SPX 2534;
So just days after Hartnett said that “3” is the most important number for the market, he doubles down, and lists 6 reasons why the S&P may re-test recent intraday lows:
- 1. Positioning: peaking optimism…Bull & Bear Indicator still in v bullish territory; big equity inflows this week; GWIM private client asset allocation 61% stocks, 33% cash & bonds
- 2. Profits: peaking…booming US 12-month forward EPS estimates now +20% (we say “peak”- Chart 4)…booming US consumer confidence 130.8, unemployment rate 4.1%, ISM 60.8…“buy humiliation & busts, sell hubris & booms”
- 3. Policy: peaking…global central banks have played “whatever it takes” card, by year-end Fed will have hiked 9 times, fiscal card played aggressively…no more stimulus to discount; only policy left to discount is…
- 4. Protectionism: starting…and market pricing as “deflationary” (yields down, stocks down…and stocks down may be necessary to stop escalation of trade war)
- 5. Price action: tech not making new highs (e.g. SMH, XLK), credit spreads not making new lows (H0A0, C0A0), homebuilders (XHB) are making new lows; global stocks (ACWI -0.3% YTD) no longer outperforming global government bonds (W0G1 -0.9%)
- 6. Pain: trough in inflation, rates, volatility (all 9-year drivers of bull in corporate bonds & equities) now challenging bullish consensus.
The Bigger picture, according to Hartnett, is that the “topping process” has started (and gives the following 1966/69 analogy as an indicator).