By Senad Karaahmetovic
Bank of America strategist Michael Hartnett took note of “uber-bearish” positioning that could result in a short-term relief rally.
Hartnett notes that Fed tightening “always breaks something” with the US recession likely the last leg lower in this bear market.
“Inflation shock (started H2’21)…rates shock (H1’22)…recession shock (H2’22) + crash (not quite done yet)…once all done and dusted in H2, opportunity knocks; we say at SPX 36k nibble, at 33k bite, at 30k gorge; opportunities in H2 for 2023 bulls…small cap & real assets (inflation), EM (dollar debasement), industrials (infrastructure), Asian consumer, and at lows best strategy humiliated "60-40" strategy,” Hartnett told clients in a note.
The strategist also discussed the prior S&P 500 bear markets with the current one being the 20th bear market in the past 140 years.
“Average peak to trough bear decline = 37.3%, average duration 289 days; history is no guide to future performance but if it were, today's bear market would end on Oct 19, 2022 (35-year anniversary of Black Monday) with S&P 500 at 3000,” Hartnett wrote.
On a more positive note, the average bull market duration is over 5 years with returns of 198% on average. History suggests the next bull market could take S&P 500 to 6000 by 2028.
As far as flows into the week to Wednesday are concerned, $16.6 billion went into stocks while $18.5 billion and $50.1 billion were outflows from bonds and cash, respectively.
Hartnett also outlined the largest inflow to US small-cap in 6 weeks ($6.6 billion), to US value in 13 weeks ($5.8 billion), and to tech in 9 weeks ($800 million).
Interestingly, the BofA Bull & Bear Indicator fell to 0.0 this week from 0.2. This is the seventh time that this indicator is at 0.0 with history showing returns from the next 3 months “strong.”
“Markets painfully oversold, so ripe for rally, but until rates shock can certify inflation shock over, rallies will likely be sold,” Hartnett concluded.