For the first time since the depths of the original pandemic selloff, a widely-cited indicator of market sentiment flashed a rare green light.
But there are caveats. Quite a few of them, actually.
After teetering on the brink of “extreme bearish” territory for weeks, BofA’s Bull & Bear Indicator triggered just the ninth contrarian “buy” signal in nine years (figure below).
The dip below 2 (the threshold) came as fund manager cash levels surged to the highest since Lehman, while equity flows stumbled and outflows from credit funds accelerated.
Poor equity breadth also contributed to the indicator’s descent into territory indicative of something like despondency.
Global equity funds shed $1.9 billion over the latest weekly reporting period after a sizable inflow the prior week (figure below). Credit continued to bleed. Lipper’s data showed IG funds managed a small inflow, but high yield funds suffered an eleventh consecutive weekly exodus, the longest streak since 2007.
Since 2013, there have been eight contrarian “buy” signals on BofA’s indicator (table below). As the bank’s Michael Hartnett noted, “back-testing shows that in the 12 weeks following buy signals, global equities have risen 8%, stocks have outperformed IG bonds and HY bonds have outperformed government bonds.”
Needless to say, circumstances in 2022 are exigent. It’s not obvious why markets should conform to any historical template other than perhaps a 1970s analogue. Hartnett’s cadence wasn’t upbeat.
“Optimal entry points into bull markets arrive” when the “trifecta of 3Ps” is present, he wrote, on the way to comparing the current backdrop to March of 2020. The ISM is 58 today compared to 41 two years ago, and policy is overtly hawkish versus Q2 2020, when “$32 trillion of stimulus was en route.”
Additionally, it’s worth noting that the three-month gains which typically follow “buy” signals played out over just a handful of sessions during this month’s positioning- / flows-driven rally.
The S&P, Hartnett observed, is up 8% since the bank released this month’s Global Fund Manager survey. “12 days are the new 12 weeks,” he wryly noted, before saying that although it’s possible “the strong rip of March can continue to test the highs,” his “fundamental” view for 2022 is that the combination of an inflation shock, a rates shock and an eventual growth shock mean a “strong selling opportunity awaits” in the second quarter.
The S&P, Hartnett suggested, is more likely to be below 4,000 than above 5,000 this year.