The animal spirits are stirring.
That’s according to BofA’s Michael Hartnett who, in the latest installment of his popular weekly “Flow Show” series, flagged the largest week-to-week increase in the bank’s “infallible” risk appetite measure in over a decade.
The pseudo-famous “Bull & Bear Indicator” probably isn’t infallible, as such, but when you backtest it, it’s pretty damn solid. In fact, it “predicted” November’s cross-asset mania. As a reminder, this isn’t an actual indicator. It’s an “indicative metric.” There are a lot of caveats. Suffice to say it’s for illustration purposes only.
The current reading is merely neutral, but the jump from 2.7 last week to 3.8 was the largest since February of 2012, Hartnett noted, citing a six-week tsunami of inflows to high yield credit as well as emerging market stock inflows.
“Bear sentiment is flipping to speculative animal spirits,” he cautioned. “Sentiment is no longer contrarian positive for risk assets.”
Hartnett believes the decline in bond yields which propelled risk over the past six or so weeks could be too much of a good thing in the event 10-year US yields get a three-handle and keep falling. “While the center of gravity for US yields in Q4 ~4% and bond yields 5% to 4% has been bullish, we say a fall in yields from 5% to 3% = hard landing = bearish,” he wrote.
Earlier this week, there was some consternation that a continuation of the rally at the long-end of the US curve wasn’t accompanied by more stock gains. Equities subsequently moved higher ahead of payrolls, but regardless of what happens in the very near-term, the generic “When is bad news just bad news?” question is set to become more relevant in January, when traders will have to reckon in earnest with the implications of a softer US labor market for the bulletproof American consumer.
“We say Q4’s ‘lower yields = higher stocks’ flips to ‘lower yields = lower stocks’ in Q1,” Hartnett said.
