The Flow Show: Markets stop panicking…
Global Research Media Relations
Refer to important disclosures at the end of this report (see link below). Please note, you may quote directly from this research report solely in your reporting as a member of the media; however all quotes must be cited as having come from a BofA Merrill Lynch Global Research report. All other copying, redistribution, retransmission, republication and any other unauthorized dissemination or use of the contents of the report or the link thereto are prohibited. If you are interested in interviewing an analyst, your request must be directed to Research Communications & Media Relations.
The Flow Show
The Flow Show: Markets stop panicking…
• Record equity outflows but BofAML Bull & Bear indicator @ 8.5...still says "sell"
• Markets stop panicking when central banks start panicking...Fed has become "buyer of vol"
• Strategy view...SPX 2540 & GT10 3% to represent good entry points in coming weeksBig Top & Big Low
Record week: $30.6bn equity outflows (Chart 2); $4.0bn into Bonds, $0.5bn out of gold.
Redemption pain: biggest in US large cap equity funds, tech, healthcare, Europe & HY bonds; in contrast big inflows into IG bonds & Japan equity funds.
BofAML Bull & Bear indicator: down from 8.6 to 8.5 (Chart 1) but remains in "excess bullish" territory signaling "sell" for risk assets.
BofAML Bull & Bear indicator: "sell signal" triggered Jan 30th...S&P500 down 10.2% peak-to-trough, global equity market cap down $6tn; unlike prior selloffs, US Treasury yields up 12bps (as opposed to avg down 52bps).
BofAML Bull & Bear indicator: average 3-month drawdown following 11 "sell signals" since 2002 (hit ratio 11/11) = 12.0% = S&P500 2510, i.e. just below 200dma of 2540.
3Ps: Positioning, Policy, Profits key to technical levels of 3% on 10-year US Treasuries & 2540 on S&P500 holding.
Positioning: 1. Feb FMS (Feb 13th) cash levels rise sharply to >4.8% (from 4.4% Jan), signaling fresh bearishness; 2. rally in rate-sensitive UTIL/XHB/REM signals yields/rate vol at peak; 3. trough in credit (JNK, EMB, LQD) and peak in US dollar (DXY) signals deleveraging over (credit leads equities - Chart 3).
Correction chronology: XBT…UTIL…GT5…VIX…JNK…EMD…SPX; last Feb dominoes to fall should be DXY, CNY, SOX & EEM.
Policy: "markets stop panicking when central banks start panicking"...late-cycle crash/correction in 1987, 1998, 2016 all arrested by policy actions; crucial to note Fed now hawkishly selling Treasuries (Chart 4) and rhetoric past few days shows Fed "buyer of vol" not "seller of vol" for 1st time since 1987; two upcoming events to soften Fed stance…1. Jan CPI (Feb 14th) <0.3%mom; 2. Humphrey-Hawkins (Feb' 28th) opportunity for Powell to signal old, cautious Fed back.
Profits: best sign corporations do not see profit peak is resumption of strong corporate buybacks in coming weeks; profits key determinant as to whether this is a correction or a bear market.
Strategy view: SPX 2540 & GT10 3% to represent good entry points in coming weeks.
