“Sell the last hike.”

That’s been the mantra for one of the sell-side’s most recognizable names, and he’s not about to give up on it now.

BofA’s semi-famous “Bull & Bear Indicator” dipped further into “extreme bearish” territory this week, a contrarian indicator which began flashing a “buy” signal earlier this month. The bank’s Michael Hartnett isn’t inclined to ignore his own metric, but he is keen to delineate between a tactical trading opportunity and a durable regime shift.

The indicator now sits at the lowest in nearly a year thanks to ongoing outflows from junk bond funds, as well as more modest redemptions from equity funds and deteriorating market breadth.

The three-month average return following nearly two-dozen buy signals looking back two decades is 6% for global equities, but a word of caution: Major shocks and credit events can short-circuit the signal. As the figure shows, the indicator dropped to 0 prior to market bottoms in the presence of historic market events, including WorldCom, Lehman, the Eurozone debt crisis, the 2015 yuan devaluation, the onset of the pandemic and Vladimir Putin’s ill-fated decision to invade his neighbor.

Last week, Hartnett cautioned that in the current environment, rallies “should be sold.” You need three conditions for a “big low,” he said, a point he reiterated this week. Investors can’t get comfortably bullish until the so-called “3Ps” are present. Those are bearish positioning, recessionary profits and policy easing.

Needless to say, none of those conditions are met. Positioning is middling. Profits are close to record highs in absolute terms even after several quarters of margin contraction, and although the market was especially unforgiving this reporting season, aggregate results are on track to beat estimates. Finally, rate cuts are a long way off, or at least that’s what the Fed would have you believe. Market pricing reflects about a one-in-four chance of another hike across the December and January FOMC meetings.

So, no “big low.” But maybe soon. Or at least sooner than many market participants are inclined to believe. “We think ‘hard landing’ probability is higher than consensus and say ‘sell the last rate hike’ in an inflationary backdrop, as higher-for-longer rates are required to tame inflation,” Hartnett went on, segueing into the “3Cs.”

The 3Cs are credit, crude and the consumer, two of which are perhaps “signaling slower growth,” BofA said. Default rates are obviously still subdued, but they’re rising. The new vintage of the Fed’s senior loan officer survey is due soon. It’ll be watched closely for more evidence of tighter lending standards and, just as importantly, waning demand for credit. The figure on the left, below, suggests defaults are finally responding to more onerous credit conditions.

As for crude, the “the lack of a war bid… is a recessionary sign,” Hartnett contended. Given elevated odds of direct confrontation with Iran (or at least with Hezbollah), you can make the case that crude should be significantly higher. But demand concerns out of China and the fact that if the war stays contained to Gaza, there’s no readily discernible supply threat, have capped prices. I’ll leave it to readers to decide whether that’s recessionary or just an efficient market waiting for an escalation that actually imperils supply before driving prices materially higher.

Hartnett also flagged the flagging Tadawul, which can’t find its footing despite crude prices which, while not accelerating as they did around the onset of state-on-state hostilities in Ukraine, are nevertheless unnerved enough by the threat of spillover from the Israel-Hamas war to stay supported at elevated levels. Saudi shares fell in six of the last eight weeks. The figure on the right, above, illustrates Hartnett’s point.

Coming back to credit, it’s notable that high yield spreads haven’t responded to rising defaults. For their part, SocGen thinks speculative grade defaults will rise “well above” both the current rate and the implied market peak, but as the bank’s Albert Edwards put it this week, editorializing around the highest number of corporate bankruptcy filings since 2010 (excluding 2020), “many investors, including those focused on the high yield market, appear to have got it into their heads that the rising default/bankruptcy rate is a lagging indicator that is in fact pointing to the start of a new economic cycle.” Suffice to say Edwards doubts that.

“The notion that we are at the start of a new economic cycle seems preposterous to me,” Albert said. “Post-GFC QE and direct COVID pandemic relief certainly kept many zombie companies on extended life support, but now the sharp rise in rates is causing a surge in bankruptcies.”

Weighing in earlier this month, ABI director Amy Quackenboss said that although bankruptcies are “still below pre-pandemic levels, the numbers of filings demonstrate the difficult challenges and growing debt loads that financially distressed families and businesses are facing in this current economic environment.”

As for the consumer, Hartnett said America’s legions of spendthrifts can remain “bulletproof” right up until “job security and wealth security is shaken by higher unemployment and lower asset prices.”

Consumer sentiment is dour, but spending remains supported by the tight jobs market and the legacy of the pandemic home equity bonanza and paper gains on financial assets.

Hartnett offered a familiar warning. The consumer, he reminded market participants, “turns quickly, as does GDP.” In the quarter prior to the last dozen recessions, real GDP averaged 3% and nominal GDP 7%.

That’s food for thought after this week’s blockbuster, consumption-driven growth report.

Nomura’s Charlie McElligott summed it up. “The metric markets continue to hone in on is labor,” he said. “The belief, without question, is that ‘once jobs go, the consumer and earnings crack, and the whole cycle goes.'”