After the recent rally in stocks, a note of caution from BofAML strategist Michael Hartnett and team. Since it’s difficult to sum it up, here are the key points made by them :
« Our tactical view: after a Jan/Feb wobble, we believe stocks & commodities will have one last 10% melt-up in H1. Call it the “Icarus trade”. The current melt up, which started back in Feb 2016, will be followed by a meltdown later in ’17.
The current rally started in Feb 2016 with…
- bearish Positioning (BofAML Bull & Bear indicator = 0, cash = 5.6%, big >2SD underweights in Emerging Markets & energy)
- excessively bearish Profits (credit spread blowout, PMI’s crashing toward 45, global EPS negative)
- and Policy impotence (« Quantitative Failure »).
Thus the rally is likely to end with…
- bullish Positioning (BB indicator = 8, cash = 4%, unambiguous long positions in stocks, Japan & banks)
- excessively bullish Profit expectations (global PMI’s >55, US wage growth >3%)
- and Policy hawkishness (Fed jacks up short end of yield curve, ECB tapers).
Are we there yet? No.
- We believe Positioning is bullish but not dangerously euphoric (B&B indicator is 3.6, FMS cash @ 19-month lows of 4.8% but elevated versus 15-year history, global equities trade just 3% above 200-day moving average).
- Profits likely to be revised higher following strong Dec’16 ISM print (implies 10% US EPS growth – Chart 2); credit spreads well-behaved with US & European spreads at 18-month lows; however PMI’s getting closer to “peak” and US wages close to 8-year highs.
- And bond market yet to aggressively price-in hawkish monetary Policy: US financials conditions in “easy” territory according to our simple model; US yield curve has stopped steepening but yet to see a “bear flattening”; ECB “taper” = key catalyst for rates volatility, but our economists say no taper in 2017. »