One of my great joys in life is perusing what people have searched for (i.e., what terms netizens have entered in search engines) on the way to eventually landing on this site.
Scrolling through that list is always highly amusing for a number of reasons, not the least of which is that it serves as a rather poignant reminder for me of just how wide I cast my net here when it comes to the topics we cover. Last month, for instance, somebody found their way here by searching for: “Is Peter Navarro really Rasputin?” The answer, incidentally, is “maybe.”
But I don’t just scan that list of search terms because it’s funny. I mean, that’s mostly why I scan it, but it’s also useful as a kind of real-time barometer of what market-related stories folks are interested in during a given week. Thanks to the fact that I’ve covered pretty much every market-related topic worth covering here and quoted every analyst worth quoting at one time or another, I can get a pretty good idea about what I need to update by taking a look at which older posts people are landing on currently.
Of course some terms pop up nearly every, single day and one of them is “BofAML Bull & Bear indicator.”
Ever since the bank’s Michael Hartnett nailed it in January of 2018 when, late in the month, his indicator flashed a “sell” signal just days before it all fell apart for markets, interest in that indicative metric has never really abated. It helps that a backtest suggests it’s literally infallible (it goes without saying that it’s probably not really “infallible”, but somehow I feel like I should add that caveat).
Here’s how this story played out as excerpted from our previous posts documenting Hartnett’s call (every time I retell this story, I feel like I’m a parent reading to small children – “Tell us about the time the Bull & Bear indicator flashed a sell signal before Vol-pocalypse dad! Just one more time, pleeeeeease!”):
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.
Hartnett writes every week, but generally speaking, we tend to wait on his monthly Global Fund Manager surveys to quote him. For us, those are more interesting than his “Flow Show” notes – but that’s just a personal preference thing.
Read excerpts from the February Global Fund Manager Survey
Well, “BofAML Bull & Bear indicator” was heavily searched this week, or at least according to how many times it popped up on the list of things folks Googled on their way to this site, so I figured I’d check and make sure it wasn’t pushing extremes on either pole again.
Spoiler alert: it’s not. It’s sitting right, smack in the middle at 4.6.
But, the five minutes it took me to check on that wasn’t a waste of time. It turns out that this week’s edition of Hartnett’s “Flow Show” series has some reader-friendly soundbites that are worth highlighting.
The context, as always, is the EPFR data and we highlighted it here on Friday courtesy of the latest daily missive from Nomura’s Charlie McElligott, who described the latest flows data as “QE-like”, where that means that folks are buying risk assets and Treasurys, as the YTD surge in the former finally draws in reluctant investor groups and expectations of a return to the post-crisis policy “norm” combined with worries about the trajectory of global growth (and clearly those two things are inextricably bound up with one another) underpins demand for bonds.
The full breakdown on this week’s flows data is in that linked post, but just in case, BofAML’s Hartnett gives you the 30,000 foot view, noting that “equity flows turned bullish [with] $14.2bn into stocks” while “$12.1bn equity buying on Tuesday [was the] largest daily bid since Sept. 20, 2018, the S&P 500 market top.” Equity flows were of course concentrated in the US, with that $25 billion figure we cited on Friday being partially offset by outflows from European and EM equity funds.
Hartnett goes on to tell you “the tale of the tape” and I guess we’d be remiss not to note that when it comes to that “tale”, the above mentioned McElligott is a human “tape”, so if you’ve been following along with our efforts to summarize and otherwise expound on his rapid-fire ruminations (and, if you read “Bull In A China Shop” and “The Long And The Short Of It“), you’re well-versed in the prevailing narrative.
Hartnett cites the “resilience of risk assets and minimal profit-taking on [the] US-China trade truce news, poor Asian export data and ECB capitulation”. In other words, folks haven’t generally been “selling the news” when it comes to the trade story. Further, any sour sentiment engendered by ongoing signs of economic malaise in Asia and jitters about the ECB’s deep cuts to the euro-area outlook, has proved fleeting.
“The pain trade'”, Hartnett says, is thus “still up.”
He flags new highs in IG and HY credit and new lows in volatility, where the latter is a reference to rates vol. grinding lower. This, in turn, shows “shows central banks [are] ‘all-in’ [and] markets are not yet willing to trade ‘policy impotence'”, he continues.
As a quick aside, that “policy impotence” trade is a tough one, because it partially depends on the crowd joining in on your contention that central banks are at the end of the proverbial road when it comes to their capacity to combat downturns and, more to the point, suppress volatility. Recall the following passage from a 2017 Deutsche Bank note:
More than eight years of monetary stimulus and forced status quo have created a situation where change has become impossible. To facilitate a change that would improve market conditions, there have to be multiple concessions to those forces against which change is directed. This has set in place the swarm effect: You can say no, but it is inconsequential.
Getting back to Hartnett, he goes on to say that the bank’s global EPS model forecast has “plunged from -2% to -10% on dire February Asian exports and global PMI deterioration”. Analyst EPS consensus, meanwhile, is 1%. He also calls the economies of Japan and the Eurozone “recessionary”, which might sound hyperbolic, but only for that half a second it takes you to remember that Italy is actually in a recession, Germany might as well be in one too and virtually all of the latest sellside research on Japan centers on the prospects for a downturn.
Moving along, Hartnett cites what he describes as “plenty” of “green shoots” in China, including M1 and new orders posting their first rise in 9 months in February, as well as exports up 39% and electricity usage up 11% while Jan-Feb investment at state-owned enterprises rose 6%, logging “the first big increase in 2 years”.
Long story short, BofAML thinks we may have seen the bottom for the global macro data.
That said, Hartnett writes that the “downside risk for growth [from here] more likely comes from the US, where consensus sees Q2 GDP bounce to 3% from 1% in Q1”. If Q2 comes in below 2%, Hartnett reckons the “risk asset rally would end”.
The good news, he notes, is that “US survey data stabilized in February and is correlated and consistent with at least 2-3% US growth.”
You might recall that last month, Hartnett described a “big fat buyers’ strike” in the latest edition of his Global Fund Manager survey (see linked post above). Specifically, equity allocations dropped 12ppt to just a 6% overweight.
Meanwhile, the number of respondents who were “overweight cash” in the February poll hit the highest level since Jan’09, as the net cash allocation jumped to 44%.
“Global stocks [are] up 11% YTD despite $46bn of equity outflows” over the same period, Hartnett reminds you, summing this situation up.
Ok, so who’s been buying this notoriously “flow-less” rally? Well, corporates, for one – and to the tune of $286 billion YTD. That’s up handily from $197 billion during the same period last year.
And then there’s call buying by institutional investors. “US equity index delta adjusted open interest at $544bn is near YTD highs”, Hartnett observes.
Oh, and there’s retail investors, who have apparently bought over $13 billion in individual stocks this year, compared to $5.7 billion in selling during the comparable period last year.
As alluded to above, it’s not hard to explain why bond yields are low in this environment (i.e., why investors are still infatuated with bonds despite the risk asset rally). Hartnett flags “easy central bank policy and still-falling global consensus GDP/EPS/interest rate forecasts.” But beyond that, he makes a larger point, which is this:
This is no normal cycle; yields are lower than they would normally be because policy makers in Japan & the Eurozone are completely out of monetary ammunition from a longer-term perspective, Chinese policy makers are targeting lower and rebalanced growth over the medium-term, and future Fed cuts are likely to prove less potent given level of US corporate debt; thus the message from government bonds remains a world where structural deflation continues to be the primal backdrop to financial markets.
You could describe the juxtaposition between, on the one hand, the situation described there by Hartnett, and on the other hand, buoyant risk assets plus the nascent “reflation” narrative (where that needs a softer dollar and “more cowbell” when it comes to stimulus efforts out of Beijing to be sustainable), as being somewhat odd. But then again, that juxtaposition has in many ways been the defining feature of the post-crisis world (i.e., incessant chatter about “structural” disinflation, worries about whether monetary policy was/is bumping up against the limits of what’s possible, slower growth than is generally desirable in a recovery, a “reflation”/”hope” narrative shimmering just out of reach on the horizon, like a mirage in the desert, and a bid for risk assets thanks to TINA). So perhaps it’s just back to “the new normal”, as it were.
Ok, so finally, Hartnett explains when it will be time to sell. Fittingly, he points you to the Bull & Bear indicator. He also references the forthcoming March edition of the Global Fund Manger survey and two possible alternate realities for the US economy. We’ll leave you with those passages from his note. To wit:
When should we sell?
When the BofAML Bull & Bear Indicator moves above 8; the following three drivers would push the indicator toward “excess bullishness” in the next 4-6 weeks: a) equity inflows >$50bn next 4 weeks, b) March BofAML Fund Manager Survey showing cash levels of <4.5%, equity allocation up from 6% to >30%, c) CTFC hedge fund positioning >0.5sd long risky assets (vs. neutral today).
When combo of higher US unemployment claims & higher credit spreads indicate onset of recession & debt deflation; or when combo of higher Treasury yields & lower US dollar indicate inflation & Fed policy mistake.