Given what’s unfolded across U.S. equities over the past month and what’s been unfolding across global stocks since the summer, you might expect BofAML’s Michael Hartnett is reveling in the chaos.
That’s not to say Hartnett is some kind of hopeless permabear – I mean, maybe he is or maybe that’s the way other people read him, but that’s not generally my take. But he certainly has a penchant for warning about possible tipping points and his style lends itself to hyperbolic interpretations, even if he doesn’t intend it that way.
It was Hartnett, you’re reminded, who on January 26 told folks that his proprietary “Bull & Bear Indicator” had just flashed a sell signal and in case you were prone to being skeptical of that indicator, he reminded you that if backtests are any guide, it’s infallible. Here’s the key excerpt from that late January note:
BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; average equity peak-to-trough drop following 3 months = 12%; note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016.
That, just days after his Global Fund Manager Survey flagged “short vol.” as the most crowded trade on the planet.
That was all looking pretty prescient two weeks later, after global equities careened into correction territory and the short VIX ETPs blew up, leading the Seth Golden crowd to ponder the depressing prospect of going back to a life spent making the cigarette break schedules at the local Target. Subsequently, Hartnett would warn that “long FAANG” had replaced “short vol.” as the most crowded trade on Earth (primarily because the short VIX ETP massacre cleared the deck). That too proved prescient as tech would promptly stumble on regulatory concerns in late March.
So what’s Hartnett up to these days? Well, the same things he’s always up to: Conducting his popular Global Fund Manager surveys (where Long FAANG+BAT has been the most crowded trade on the planet for nine consecutive months) and penning weekly notes on flows. As to whether he’s pleased that his long-standing implicit predictions of market turmoil are starting to play out, the answer is not perceptibly, but in the latest edition of the Thundering Word, Hartnett does contend that he’s “still bearish”.
“It’s (almost) an official global equity bear market [with the] MSCI equal-weighted global index now down 19.6% from the intraday high on January 29th”, he writes, adding that “asset carnage [has spread] cross-market and has infected US tech leadership.” Speaking of tech leadership, it looks like Thursday’s rebound in the Nasdaq off the Wednesday collapse could prove fleeting in light of disappointing reports from Amazon and Alphabet.
Hartnett goes on to rattle off some statistics, noting that the “annualized loss in US Treasuries (-9.7%) and IG bonds (-4.0%) is the 3rd largest since 1970 and 18 out of 21 commodities are in corrections of >10%, with lumber down 53% and copper down 23%.”
He also flags the recent widening in CDX HY. He’s got a simple chart on that, but it’s always better to plot that inverted with equities, just so you can see the extent to which HY is widening out as stocks selloff, so I went ahead and did it that way.
But the real kicker comes when he gets more granular in the course of documenting the malaise. “1742 of 2767 global stocks, 919 of 1150 EM stocks and 1164 of 1899 NYSE stocks are in bear markets,” Hartnett marvels, adding that all told, “63% of global stocks are in a bear market (80% in EM, 61% in US)”.
As far as that 63% number is concerned, Hartnett reminds you that “at the 2011 and 2016 equity market lows, that figure maxed out at 70% [which] tells you if this a big correction and not a harbinger of recession/crash, an excellent entry point would coincide with better policy news.”
That said, he goes on to warn that it’s a bad sign when things that are oversold aren’t able to sustain a bounce. “[It] suggests investors are worried by either a systemic financial market event or recession”, he adds, stating the obvious.
If you’re bullish (which, again, Hartnett is not), he thinks snapping up some of the distressed assets mentioned in “Slow Bleeding The Aging Bull” might not be a terrible idea. But that’s if you’re bullish. If you’re bearish, well then it’s defensives, cash, vol. and gold for you.
We’ll leave you with Hartnett’s “crash watch” because you know you want it.
Crash watch: $45tn of systemically risky shadow banking assets (source BIS), of which 72% (in bond ETFs, mutual funds, credit HFs, bank loan funds) are vulnerable to forced selling (note record $14bn outflows from IG funds past 10 days = 4sd event); record $4.2tn of CRE (commercial real estate) debt outstanding, and 73% of loans in CMBS last 9 months interest-only; ‘87/’98 “late-cycle” crashes coincident with policy disputes & currency volatility (watch ADXY <100); there are vulnerabilities and therefore catalysts for higher volatility.