“Everyone is bearish but no one has sold stocks,” BofA’s Michael Hartnett said, in the latest installment of his popular weekly “Flow Show” series.
He was referring to a familiar statistic. For every $100 that flowed into equity funds since January of 2021, just $2 has come out. That doesn’t exactly scream “capitulation,” even if positioning prior to this summer’s rally looked a lot like despondency.
The figure on the left (below) shows fund managers’ supposed underweight in stocks (i.e., the net percentage of those professing to be Overweight in BofA’s monthly poll). Note that the move up to -26% in August from July’s extreme -44% is consistent with discretionary investors chasing a rally that ran away from them — a pain trade as the “under-positioned bearish masses” chased a systematic bid higher, like children bounding after elusive dandelion seeds carried along by a summer breeze, as I put it last week, mixing a Charlie McElligott quotable with a wistful simile.
The figure on the right (above) juxtaposes the equity underweight with the 12-week moving average of equity fund flows as tabulated by EPFR, as a percentage of AUM. That’s not the most apples-to-apples comparison I’ve ever seen, but it’s not apples-to-oranges either. They track pretty well, and the current disparity is glaring enough to suggest some cognitive dissonance among investors, even as one measure represents anecdotal accounts from professionals and the other flows into ETFs and mutual funds.
Note also that cash levels in BofA’s fund manager poll fell in August, again consistent with rally-chasing, but remained well above historical averages.
One criticism of the rally off the June lows revolves around the notion that it erased a sizable chunk of what many viewed as a healthy de-rating in expensive equities. For Hartnett, a “21st century” multiple doesn’t make sense given the epochal macro shifts witnessed over the past 12 to 24 months.
The range for the S&P is defined by the tug of war between a 21st century multiple and a 20th century PE (figures above).
“[The] drivers of high 21st century PEs are all reversing,” Hartnett reiterated, before listing a few examples: “QE, fiscal austerity, free movement of trade, people, capital, geopolitical peace.” The new regime, by contrast, is defined by higher inflation, and for BofA that entails adopting a secular view centered around the idea that cash, commodities and volatility will outperform bonds and stocks.
The inflation, Hartnett suggested, will continue to be in “things we don’t have enough of [like] energy, workers, places to rent, food, raw materials, good infrastructure [and] military equipment,” while the deflation will be in government debt, office space, mobile phones and streaming content, all things we have in abundance.
Hartnett described himself (and I assume this applies to BofA’s equity team too) as “patient bears.” Investors, he suggested, might consider fading a rally that sees the S&P trade above 4,328.
“We don’t think the ultimate lows have been seen, though they may come next year,” he wrote, calling this a “classic bear rally,” that may ultimately prove self-defeating. He posed it as a question: “You think SPX >4,500 and the Fed’s going to stop hiking?”
This makes sense to me. Wish we had a “like” button.
I want to put my money where the 10% of the wealthiest (who control about 78% of global wealth) invest their money.
Cash, commodities and volatility all seem like very short term trading ideas.
Well, I kinda think short term is all we got.
Today is ugly. Not because stocks are down that much, but the stock/bond correlation is so high- nervous about hawkish fed, geopolitics, inflation and options/futures friday expiry does not help
It’s not just that it “does not help,” it’s all that matters. The gamma drop-off is huge. Spot was pinned (see chart below). Somebody at BBG (Alyce Andres) finally wrote about this yesterday (on the terminal: “S&P 500 Index Has A Gamma Magnet at the 4300 Level”), but I mean it’s just so funny how unwilling “regular” market participants are to concede that on some days, it’s just not worth trying to craft a narrative. If you’re not trading tactically and/or if you’re comfortable with your stops, you might as well just go fishing. What you’re seeing on the screens is totally meaningless from a fundamental perspective.
https://heisenbergreport.com/wp-content/uploads/2022/08/SPXStrikesProfileGammaFront.png
What is the effect of 401k flows for market support? Workers probably don’t change allocation quickly or easily. Unemployment is low.
Will “capitulation” look the same as it used to?
H-Man, I don’t understanding all this hand wringing. A macro perspective from the most glass half-full view, both globally and for the US, is really ugly. Tell me a good story about something happening outside of the US. If you say Turkey cutting rates, stop reading this post. Then tell me a good story about the US. After you mention employment, you start scratching your head. So just accept it, we have a lot of bad news we are dealing with that does not bode well for the markets.
“You think SP>4500, and the Fed’s gonna stop hiking?” … no I don’t….I’m expecting Powell to speak at Jackson Hole in full hawk regalia while squawking and screeching through it all…and if markets continue to dismiss and laugh him off we’ll be seeing another 75 basis points higher next month…remember Hitchcock’s The Birds…
Good article, good commentary. In 1993, Dr. Alexander Elder published Trading for a Living. He mentioned that people generally ignore the time dimension. Two, a guy I really respect says “Even when we largely agree on the outcome, nobody knows what the path there will look like.” That’s why this is not a zero sum game. Many, many paths. That’s why each of us strives to develop a set of indicators we look at regularly, a checklist to monitor ourselves, and a firm commitment to improve our knowledge even when we don’t like what we are hearing….By the way, successful people fail all the time. The universal fact is this- the big competitor is myself and my flaws, not the market.