Well, I guess you’ve gotta hand it to BofAML’s Michael Hartnett.
I mean, he “nailed it.” He literally told you idiots to sell on January 26 and in case what he was saying was in any way unclear (and it wasn’t, because he also reminded you that his indicator was 11/11 when it comes to these sell signals), he used that damn big, bright, Bull-&-Bear-o-meter to drive the point home.
From January 26:
Short of kicking down your actual office door and forcing you to hit the sell button at gunpoint, that’s about all anyone could expect of an analyst when it comes to warning people of impending doom.
Hartnett has been flagging risks for some time now and notably, he said the following late last year in his 2018 outlook:
We forecast a H1 top in risk assets as the last flames of QE, US tax reform and robust EPS incite full capitulation into risk assets
Volatility…peak positioning, profits, policy = peak returns and trough volatility; 50-year low in stock volatility, 30-year low in bond volatility likely to be followed by flash crash (à la ’87/’94/’98) in H1.
Well by God, that could scarcely have been any more prescient. The full capitulation into stocks came in January when equity funds saw their biggest inflows on record and the volatility trade blew up and triggered a flash crash less than a month later.
And just to add to the list of shit Hartnett has nailed recently, if you look back to his January fund manager survey, “short volatility” was flagged as the “most crowded trade” for the first time in the poll’s history. I mean technically, that’s the fund managers “nailing it”, but you get the point. At the time, Hartnett wrote this: “vol spike imminent.”
Well fast forward a month and the new edition of the fund manager survey is out. Now, “Long FAAMG+BAT” has supplanted “short vol.” at the top of the list.
For whatever it’s worth, short vol. is now third. Of course I guess that depends on how everyone is defining “short vol.” There’s certainly an argument to be made that cleaning out the Target manager crowd is just the first step in bankrupting the short vol. trade.
The biggest tail risks remain largely unchanged. Here’s the breakdown:
I think one thing you should note there is that the top three are in some respects all the same thing. If you get a bond crash triggered by a sudden uptick in inflation concerns, that puts the Fed in a position of making a policy mistake and if the bond crash ends up driving cross-asset correlations higher, you get market structure problems or at least where “market structure” can be couched in terms of the risk embedded in markets by rules-based, model-driven strats that would be forced to deleverage like they were last week.
Anyway, fuck it. This was more long-winded than I wanted it to be, so skipping to the bottom line, Hartnett also notes that managers cut their equity overweights, raised cash and bought some protection, but on balance, there’s no all-clear yet as that damn brightly-colored indicator shown here at the outset is still sitting at 8.4. Here’s the conclusion:
While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip.