Honestly, I hesitated to cover this because in their infinite wisdom, the do-it-yourself crowd has developed an unhealthy obsession with it, but based on the number of people who have apparently landed here over the past three days by searching for it, I suppose I need to update everyone on Michael Hartnett’s “Bull & Bear” indicator.
Regular readers know I like BofAML’s Hartnett. His style is engaging and his notes – written almost in tweet form, with segues denoted by “…” and bullet points used with reckless abandon – make for entertaining, short reads in a world where analyst commentary is generally long-winded and, worse, hopelessly dry.
That said, the world’s fascination with the “infallible” “B&B” indicator is probably not entirely healthy. While it’s got a stellar track record, it’s never a great idea to rely on a single indicator and that seems to be what some folks are inclined to do after last year. Here, for those in need of a refresher, is the standard backstory I always include for context (this is excerpted from our previous coverage):
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.
That’s why folks are so fascinated with the ol’ B&B indicator. Or at least that accounts for the recent fascination.
Well, as you might imagine given what’s been going on across markets, that indicator is now flashing its first contrarian “buy” signal since Brexit.
“BofAML Bull & Bear Indicator falls to 1.8, i.e. ‘extreme bear’ reading, triggering 1st ‘buy’ signal for risk assets since Jun’16 (BREXIT)”, Hartnett wrote in his latest weekly, dated Thursday. He also reminds you about the call mentioned above, even including an annotation on the visual (left pane).
Below are the median 3-month performance stats from 15 buy signals since 2000 – the point being, global stocks tend to rally, equities tend to outperform IG and HY tends to outperform government bonds.
As far as where Hartnett sees the best tactical trading opportunities, he notes that there’s “trading upside China and German stocks, US small cap, semis, energy stocks, US & Euro HY bonds, and EM FX”, all of which he calls “very oversold”. On the S&P, he sees a “likely bounce” to as high as 2650. You’re reminded that according to Nomura’s Charlie McElligott, “PMs and traders” might be looking to fade any rally predicated on a dovish pivot from Powell at the ~ 2575 / 2600 level.
Before you get too excited based on the “buy” signal from the “infallible” B&B indicator, do note that Hartnett doesn’t think this is “The Big Low”. For that, we’ll need to see a trough in profit expectations and a “policy panic” which he defines simply as “the Fed cuts to prevent credit events.”
Read more on “The Big Low”