A bear-market rally could be lurking, but investors should ‘sell any rips’ , says Bank of America


Despite the big losses on the stock market so far this year, it is not over until it is over and investors should continue to sell with big higher bounces.

This is the advice of a team of Bank of America strategists, led by Michael Hartnett, in his Friday note “Flow Show.” The focus for the bank is to increase the debate over whether the market has capitulated, which means that investors are basically giving up trying to make up for lost profits.

Some strategists see capitulation as a sign that the market has bottomed out and a good time to buy stocks. However, even a drop of about 1,200 points for the Dow Industrial DJIA,
-0.18%
Earlier this week, a bearish market for the Nasdaq Composite COMP,
+ 0.05%
and an upcoming one for the S&P 500 SPX,
+ 0.01%
has not convinced everyone that the sale is over.

Shares were up on Friday morning, but major indices were still poised to add a series of weekly losses.

Reads: The technician who called the 2020 market fund says there is a “shocking rally”

Bank of America noted high levels of cash for investors – it reported earlier this week that global fund managers’ cash allocations were the highest since 2001 – and its own bullish indicator. bassist point to capitulation.

BofA global research

But other pieces of the puzzle are missing, they said. For example, both the bank’s institutional and private customer flows are not at a minimum. Among its private clients with $ 2.9 trillion in assets under management, 62.8% goes to equities (the lowest since February 2021), 18% to bonds (the highest since July 2021 ) and 12.1% in cash (the highest since January 2021).

Of course, they point out, there is no “true capitulation” of the Federal Reserve in sight. This often means a massive market downturn that causes the central bank to ease the tightening of monetary policy. It would first require a systemic event and an increase in the unemployment rate, Hartnett said.

BofA global research

The bottom line is that the stock market is “very vulnerable to [a] bassist rally, but we would still argue that “we sell any breakage,” Hartnett and the team said.

One more thing investors should keep in mind is that the crashes of the last 40 years have led to a rapid acceleration of the Japanese yen USDJPY,
+ 0.10%,
note:

BofA global research

Reads: How long does the average bear market last? Selloff leaves Dow, S&P 500 near the threshold.



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