Inflection?

Investors were “back in credit,” “back in tech” and “fading inflation” over the past week.

That’s according to the latest flows data, aggregated and narrated by BofA’s Michael Hartnett.

Investment grade credit, which took a severe beating along with every other asset class that wasn’t commodities in the first half, saw the largest inflow in 11 months on EPFR’s data.

Lipper’s figures showed a small inflow to US IG credit over the same period, the second consecutive. Note that the $1.22 billion IG funds took in on the Lipper series in the week to August 3 marked the first inflow since March (figure below).

The 18-week exodus, which saw some $74 billion hit the exits, was the longest on record.

The inflection in credit flows is notable. IG was beset by duration worries and high yield caught up in the generalized risk-off tone that dominated for the first six months of the year. It’s by no means obvious that the proverbial coast is clear. Maybe the highs for long-end Treasury yields are in, maybe they aren’t. Maybe the US economy is headed for a proper recession, maybe it isn’t. And so on.

The credit story is an article all its own. The point here is just to note, as BofA’s Hartnett did, that inflows to IG, HY and emerging market debt have resumed the past three weeks after suffering “sustained outflows” since January.

At the same time, resources have now seen outflows for eight weeks in a row, the longest streak since January of 2019. The figure on the left (above) suggests a kind of turning point — a nascent shift in the zeitgeist.

Renewed inflows to tech (figure on the right, above) could be viewed in a similar light. Flows follow performance, and US tech shares are up 20% from the lows, thanks in part to receding long-end yields.

Apropos, US growth funds enjoyed the largest inflow of the year, a $2.5 billion haul, while US equity funds as a group took in $11 billion, the most in two months. Almost $10 billion of that went to large caps.

In a testament to the notion that there’s still ample dry kindling (both of the psychological, “FOMO” variety and of the real-world under-positioning sort) to drive additional gains, BofA’s pseudo-famous “Bull & Bear Indicator” remained stuck at 0.0 for the ninth consecutive week (figures below).

The indicative measure once again proved itself a capable ally in an otherwise challenging endeavor: Identifying tactical inflection points based on positioning and sentiment extremes.

Equities are up smartly since the indicator flashed an “unambiguous” contrarian “buy” signal in May, although, as Hartnett cautioned at the time, a “sell-any-rips” mentality was probably the best approach. The S&P promptly rose 7% before retreating sharply in June, only to stage a 15% rebound from that month’s lows to this month’s highs.

BofA’s strategists are among the rally’s most ardent skeptics on Wall Street. A month ago, the bank lowered their year-end target for the S&P to 3,600.