Bearishness may spark near-term stock rally, says BofA

Bearishness may spark near-term stock rally, says BofA
Strategist Michael Hartnett sees a 'contrarian buy signal.'
OCT 20, 2023
By  Bloomberg

Investor positioning in stocks has become so bearish that it’s triggered a “contrarian buy signal” in a custom Bank of America Corp. indicator, setting up the asset class for a short-term rally, according to strategist Michael Hartnett.

The BofA bull-and-bear reading dropped to 1.9 from 2.2 in the week through Oct. 18, driven by outflows from emerging market debt funds, high-yield bonds and global equities, as well as a jump in allocation to cash, Hartnett said. A drop below 2 is seen as a contrarian signal of a near-term rally. 

In the three months following 20 such occurrences since 2002, US stocks showed a median gain of 5.4% and global equities a 7.6% advance, the strategist wrote in a note dated Oct. 19. 

“Investors are sufficiently bearish” for the S&P 500 to hold above 4,200 points and the yield on the 10-year Treasury to find a ceiling at 5% for the next three-to-four weeks, Hartnett said. “Put another way, if the index can’t hold at 4,200 with this level of bearishness, then there may be imminent risks of a credit event or hard landing,” he added.

Hartnett has remained broadly bearish this year, even as stocks rallied in the first half.

The benchmark S&P 500 closed Thursday at 4,278 points — about 1.9% above 4,200, which is also close to the index’s 200-day moving average. That’s considered a key technical support level and used by traders to assess whether the longer-term trend is up or down. 

US stocks are tracking a third straight month of declines in October after bond yields surged on worries that central banks will remain hawkish for longer. The 10-year Treasury yield inched toward 5% on Thursday, before pulling back as Federal Reserve Chair Jerome Powell said the central bank was inclined to hold interest rates steady again at its next meeting.

Bank of America’s fund manager survey this week showed investors flocking to cash as they expect economic growth to falter.

But in the week through Oct. 18, money market funds saw the biggest outflow on record at $108.9 billion, according to Hartnett’s note, citing EPFR Global data. Global equity funds had redemptions of $5.2 billion, while $2.1 billion went into bond funds.

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