“These Are All Starting To Crack”: Bank of America Spots 4 Bearish Anomalies

Friday, October 19, 2018
By Paul Martin

by Tyler Durden
Fri, 10/19/2018

In the latest Flow Show report from BofA’s Michael Harnett, the Chief Investment Strategist notes that, as expected, there was a major flow capitulation during the last week following the worst rout in the market since February. To wit, there was a massive $15.8BN outflow from equities, coupled with $8.1BN out of bonds.

Broken down by category, there were big outflows from US stocks ($14.8BN), mutual equity funds ($15.5bn) and, of course, Europe where some $4.8Bn fled following the latest Italian turmoil. Credit was not spared either with a “huge” $6.2 billion in IG bond redemptions, one week after what was already record outflow from investment grade.

Meanwhile, the recent reversal in investment sentiment continues with $11Bn in outflows from financials over the past 7 months, after $32bn in inflows since 1/17; in just the past 4 weeks there have been $2Bn in tech redemptions after $42Bn in inflows since January.

Offsetting the flight from risk, BofA highlights an institutional “dash to cash” manifesting in the 3rd heaviest day of volume ever in Eurodollar futures (ED1), while Hartnett also notes that private clients have been aggressively turning to T-Bills with the allocation as % debt holdings at 10-year high of 2.8%.

What these flows demonstrate is that, despite the still resilient market, investors are heading for the exits in ever greater numbers. They may have a point: as Hartnett notes, there have been at least 4 distinct bearish anomalies in recent days:

1.Markets oversold…yet risk can’t catch a bid
2.China easing (the China Monetary Conditions index is at a 14-month high)…yet SHCOMP, CNY, EEM can’t catch a bid
3.US fiscal stimulus of $1.5tn…yet US small caps now flat YTD and domestic cyclicals getting destroyed
4.Treasuries >3%…yet bank stocks falling & US$ no longer rising

To this list one can also add earnings, which are expected to post near record growth for the 3rd consecutive quarters, yet markets appear oblivious.

So with fundamentals increasingly ignored, the technicals are especially critical, as Marko Kolanovic noted earlier.

Specifically, Hartnett writes that the more fragile & volatile the market, the more technically obedient the investor: It is hardly a surprise that everyone expects a year-end rally, and if SPX & Nasdaq hold 2678 & 7485, then the BofA strategist expects a rally led by a barbell of oversold “growth” e.g. social media & distressed “value” (EM, Italy, homebuilders, banks).

However, if these key levels fail, then beware a flush lower via oil, US tech, private equity, US small caps, and US buyback winners.

The Rest…HERE

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