Regarding the Equity Markets -- a Time for Caution

The facts generally:  Inflation is under-reported, GDP is over-reported, the consumer is pulling back sharply, credit card delinquencies rising, regional banks are in a crisis, interest rates are relatively high and the yield curve is inverted.  It appears a large recession is bearing down on us, but as for the equity markets, I am hearing, not yet.

Financial Regulators hold the regional banks closely to their bosom, bailouts to students continually flow and other massive government spending all keep weekend at Bernie’s raging (as does the fentanyl crossing the border).

In these demonic times, trying to call tops and bottoms is for people that can separate the reality of our circumstance and the matrix that is the stock market.

One of the greatest market experts, Mike Hartnett of Bank of American (yes, a deeply woke bank, but a remarkable equity market analyst and economist) reports in his weekly Flow Show, If Stocks were the Super Bowl, dated February 8, 2024:

“Positioning: bear positioning in 2023 was markets’ best friend; in 2024 positioning flipping from tailwind to headwind; not quite there yet, and mustn’t forget the old market adage "tops are a process, lows are a moment"(because human nature means “fear” so much more easier to reverse than “greed”), and mustn’t forget that in bubbles markets show little respect for positioning (or valuation...they solely respect policy and real interest rates and growing cohort of investors say no stopping bubble until 10-year real rates back above 2½% at minimum–Chart 3); but still worth noting a number of BofA proprietary trading rules are (unsurprisingly after a SPX move from 4k to 5k in 12or so weeks) closing in on “sell signals”...

  • BofA Bull & Bear Indicator now 6.8...contrarian "sell signal" of >8 awaits combo of a. BofA FMS cash levels <4¼%, b. on going inflows to EM debt & stocks, c. HF futures positions long S&P500, d. global stock breadth boosted by +10% rally in China/HK;


  • BofA FMS Cash Rule (latest cash level 4.8%...Feb Global FMS released next Tuesday); rule is "sell" if FMS cash<4% of AUM and/or FMS cash levels drop>0.5 pps in 2 Feb FMS cash levels 4-4¼% in a “normal” cycle (this ain’t one) should arrest upside (need sub 4% for downside);


  • BofA Global Flow Trading Rule...this rule says ”sell” when inflows to risky assets  (global stocks & HY bonds) exceeds 1.0% AUM in a short 4 week period...past 4 weeks we’ve seen inflows equivalent to 0.6% AUM...“sell signal” requires $20bn inflow to equities & $6bn to HY in next 2 weeks;


  • BofA EM Flow Trading Rule...narrowly focused on EM, this rule has already triggered “sell signal” for EM stocks as 4-week inflow to EM stocks (2.8% AUM or $42.1bn) has exceeded 1.5% of AUM.”

Be cautious and note, when market volatility is low due to what appears a euphoria buying spree, buying downside protection via options tends to cost less.

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