Bank Of America Sets A Date For The Market's "Great Fall"

Tyler Durden's picture

With the US stock market likely to continue its levitation today, it means that by close of trading, the S&P500 will be above 2,400, the same as Goldman's year end price target, and 100 points away from Bank of America's "euphoric blow off top" destination, which is also known as Michael Hartnett's Icarus Trade. In a note released overnight, Hartnett confirms that he is "sticking with our “Icarus Trade” targets: SPX 2500, GT30 3.5%, DXY 110, oil $70/b", even as he admits that the euphoria level in stocks is unprecedented:

  • Yes, markets are increasingly overbought (it’s now 96 trading days since SPX fell >1% in one session).
  • Yes, sentiment is increasingly bullish (our Bull & Bear Indicator is 7.0, close to the 8.0 sell-signal).
  • Yes, the easy money has been made. But we believe a March Fed rate hike at a time of booming macro data will cause the bears to fully capitulate into risk assets, causing the melt-up toward our targets in Q2.

He also notes that the renewed jump in bond yields is coinciding with renewed outperformance by small cap & banks, and by high yield bonds vs. investment grade bonds, "thus we are willing to remain long risk assets for a little longer."

* * *

However it is what happens after this blow off top phase that is more interesting: that is the moment the "Icarus" trade becomes the "Humpty Dumpty" trade.

According to bank of America, "the “great fall” in risk assets comes when hawkish Fed & weaker EPS combine." That particular fusion will take place in H2, which is when Harnett says it will be time to get out...

The Fed has hiked just 2 times in the past 10 years. On March 15th the Fed will likely tighten for the 2nd time in 3 months. A second rate hike in 3 months would cause markets to anticipate a hike each quarter in 2017, and a jump in the Fed funds rate to 1.5-2% by early 2018.

As if that wasn't enough, March 15th is also the date of the Dutch election, and also when the US debt ceiling will be - hopefully - reinstated and immediately surpassed.

However, it is the Fed's tightening that is the biggest concern to BofA: "this acceleration of US financial tightening is a huge deal, and could in time become hugely negative. (In contrast, there were 35 Fed rate hikes in the 1970s, 28 in the 1980s, 11 in the 1990s, 20 in the 2000s – Table 1)."

Historically, once the Fed starts tightening, it keeps tightening until there is a “financial event” (Chart 4). This is likely to occur at a much lower rate of interest in the past given the economy & market’s reliance on QE in recent years,

Another warning from an increasingly concerned Hartnett: extreme US rate differentials can cause financial instability. US-German 2-year rate differentials are currently at 28-year highs (Chart 5). Rate differentials this wide have in the past either required either policy intervention (Plaza Accord in 1985) or have coincided with bad “events” (1987 crash, 1997 Asia crisis).

* * *

Putting it all together, BofA writes that "while for the moment we remain tactically bullish, we need to acknowledge the vulnerability of risk once the Fed gets going raising rates, to the extent that they coincide with a bear flattening of the yield curve and lower EPS expectations (see Investment Clock above). Like Humpty-Dumpty, risk assets will invariably have a great fall once the “wall of worry” is climbed and investors stop worrying.:

After all:

  • The current US equity bull market is already the 2nd longest ever, and will become the longest ever if it runs past August 22nd 2018; and the bull market will become the 3rd largest ever at 2467 on the S&P500.
  • At some stage in coming months our Bull & Bear Indicator will likely exceed the “greed” threshold of 8 (Chart 6)
  • Private client exposure to stocks will likely reach new all-time highs (current equity allocation is 60%, not far from Mar’15 peak of 63% - Chart 7); note their exposure to debt has already fallen to 12-year lows
  • Meanwhile, with US consumer confidence at 15-year highs, small business optimism at 12-year highs, US ISM at a very high 58, and European PMI’s at 6-year highs, the run of better-than-expected data may end by this summer.
  • And ominously, Chinese money supply (M1) growth – a lead indicator of Chinese nominal activity - has rolled over hard on a year-on-year basis (Chart 8)…and some might rightly argue that China (more than Trump, Yellen and so on) has been the true driver of the cyclicals in the past 2 years.

* * *

BofA's bottom line: "we recommend buying S&P 500 puts for the second half of 2017."

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Soul Glow's picture

Sell in May and go away will have some truth to it this year.  

CPL's picture

Naw, they'll print again.  If they don't deflation kicks in and destroys all the capital they've believed they leveraged.  The people 'in charge' have painted themselves into a corner and have no choice in the matter.

DOW 36000!!!!  (That's their plan)

Paper Boy's picture
Paper Boy (not verified) Darktarra Mar 2, 2017 11:15 AM

Bitcoin doesn't need any "crisis" to get to $10,000 USD. But a crisis in the dollar or bond market will send BTC into the hundreds-of-thousands and eventually millions of dollars. So don't lose out and look back someday like a butt-hurt "stacker".

losses mount's picture

Prediction time eh.

I see the Dow tumbling fifty percent in September to a low of 25,000.

froze25's picture

For the love of God, there is no reason that Bit Coin and "Stacking" PM's are exclusive to each-other or antagonistic in their relationship. Both serve different functions. Bit-Coin, limited in the total amount that will ever exist (so far uncounterfeitable) Same as gold. Gold you can touch it and trade it for in-person transactions, Bitcoin can do that as well but really shines through for internet transactions. Its not one or the other. Both have Uses in different applications.

techies-r-us's picture
techies-r-us (not verified) froze25 Mar 2, 2017 11:41 AM

The US will soon pay (economic breakdown) for its role in the greatest injustice of the 20th century.

Escrava Isaura's picture

Bank Of America Sets A Date For The Market's "Great Fall"

Have Bank of America no shame? Their situation must be desperate.

2008 Financial Crisis:

Bank of America Corp was rescued by the U.S. government on Friday through a $20 billion bailout…..

The capital is on top of $25 billion that Bank of America previously got from the Treasury Department's Troubled Asset Relief Program (TARP) in October and is the latest

Bank of America: Too Crooked to Fail

At least Bank of America got its name right. The ultimate Too Big to Fail bank really is America.



USS Bernanke's picture

Why are we to believe these guys again, especially on a medium term duration forecast in a short term voltailie market?  Hmmm, no thanks.

Markets are going up++ ; there is much at stake; this is the counterbalance to the exuberance.

Mr 9x19's picture

bla bla blaaaa...










bla bla bla....


prime american's picture
prime american (not verified) Mr 9x19 Mar 3, 2017 5:22 AM

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...

Pickleton's picture

Dont bother with his link.  Just stupid anti-Semite conspiracy crap.

losses mount's picture

Paypal works just fine for me. Bitcoin is only useful in the online drug trade as far as I can tell.

HillaryOdor's picture

Just think how big that market will be when the economy tanks and everyone is miserable at their minimum wage jobs loaded up with 50k of debt to get their worthless degrees.  It's not like starting a business will be any easier, so people will be in all kinds of despair and looking for escape.

Paper Boy's picture
Paper Boy (not verified) losses mount Mar 2, 2017 1:54 PM

You're nothing but a collaborator in my view. Pay Pal worked against Wikileaks in 2011 and I am a Wikileaks mirror.

One shot in the head for collaborators.

CPL's picture

It's okay, BitCoin transactions surpassed PayPal and the top four major international banks in terms of capital transfers last year.  Let them confuse themselves with the numbers they obtain from people that are known lying sacks of shit.  Versus the entire growth of BTC which is based on organic growth, unlike fiat crap they are all heavily getting screwed by and are forced to use. 

Remember, you are talking to quasi-religious communists that like to pretend they are great business leaders and champions of industry.  The fact is they are just slobs looking to do as little as possible to hoodwink themselves out of their own capital, savings and businesses.  They like easy, they love the easy button.  They love being part of a herd of mindless bipeds.  To you my recommendation is just smile and nod at them because trying to explain benefits to goats, sheep, pigs and other livestock doesn't do anything but scare the shit out of them because they...again...are very very dumb.  They like being told what to wear.  What to buy.  What to eat.  When to sleep.  Who they need as a leader.  Most to obey the herd instructions.

Escrava Isaura's picture

BTC which is based on organic growth……..

Since when Zero Hedge become a new onion site?

BTC is a scam.

Post collapse it will be worth zero.

As it should be now.

Also, what a confusing post.



matter.form's picture

It is a people's fiat currency. In case you haven't noticed, we're nothing but fiat currency here anymore. Long metal and muscle.

Txpl9421's picture

That is such an ignorant comment.

no ice's picture

You apparently know nothing about Bitcoin.

silverer's picture

Good one. A great description of the insanity out there. I think the DOW should really be at ____________. lol

froze25's picture

Stockman really hit on this recently.

chubakka's picture

problem with bitcoin is its not that liquid.  

Paper Boy's picture
Paper Boy (not verified) chubakka Mar 2, 2017 1:49 PM

Exactly... which is why you want to get in now before everyone starts buying at $10,000 and $100,000 BTC.

Yog Soggoth's picture

So you can't trade bitcoin for physical? News to me.


Bitcoin only needs crisis when it taks several hundred dollars per coin on a regular basis. 

Fuck off, Fonestar wannabe - you aren't even good enough to tongue Fonestar's fart box.  

Paper Boy's picture
Paper Boy (not verified) SILVERGEDDON Mar 2, 2017 2:21 PM

Bitcoin can keep "crashing" to $1 million and beyond for all I care. I will still be laughing and losers will still be losers.

junius's picture

could you specify who you are insulting?

Giant Meteor's picture

So, the first half of 2017 it is then ..

mayhem_korner's picture

However, it is the Fed's tightening that is the biggest concern to BofA


I would have thought it would be resuming MtM accounting.

Soul Glow's picture

You can't print without a crisis.  I see the "unexpected" happening - stocks tumble back to DJ 17k - 18k next fall, stocks wade around that for a year or so, and then crash down to DJ 10k, at which point the banks need bail outs and Trump delivers.  He's a Goldman puppet afterall.

ParkAveFlasher's picture

Is +10k effectively the same for the 99% as -10k?

CPL's picture

They own the media, they own the banks.  They own and manage every religion.  They govern ever financial trust.  They own all the bits and pieces of the carnival.  They will manufacture consent endlessly to make sure everyone is occupied chasing shadows and completely brainwashed to ensure there is nothing but 'success' in Cointel slavery practices.  And they don't need an excuse to print more money, like they would need to notify anyone here if they did.  You really think money means anything to people that can print a trillion dollars from thin air?  No, it doesn't.

They've already got everyone's permission to do whatever the fuck they would like to do.  They'll fuck kids.  Murder anyone they choose.  Run their banana republic empire anyway they like.  It however, like all things end, usually takes a big plague to kill all their slaves to starve them out.  (which is actually happening under their noses right now)

The irony in the situation is they developed that virus to make a profit and now it's killing off all their customers.


chubakka's picture

only three things are guaranteed, death, taxes, and bailouts for banks.  

matter.form's picture

The only thing that has existed continuously for the duration of the human species is death. Everything else is temporal. Death is constant.

yogibear's picture

DOW 36,000, no problem. That's conservative.

CPL's picture

DOW 1 Zillion!!!  Have they told the golden 'emperor' in Algeria he's the scape goat yet?  (et tu Brute?  Et tu?  Damn straight cunt, stab! stab! stab!)

SeuMadruga's picture

Dow 180.


ps: degrees.

CPL's picture

Put your money where your mouth is then.  X3 leveraged trade instruments to capitalize on Bull or Bear markets.




RichardParker's picture

At some point, printing will no longer cut the mustard.  They'll default.

CPL's picture

No, they never will.  They can run this until DOW 36000 then the script running it crashes. 

However here's the catch.  By that's point time though the hyper-inflation will have caused a good shove across all sectors and bumped costs for everything.  Even the 'rich' people will be turned into pennyless bums in that situation, and it's not that far away from 21000 thousand.  I'm planning on sticking around to watch all the ex-billionaires of the world sit and eat cat food from a can with a stick.  I figure it's just after they go all hobo street bum, since their assets won't be worth sweet fuck all when the DOW is at 36000.

cornflakesdisease's picture

Yup.  Wait until they start issuing 40 and 50 year bonds.

Zorba's idea's picture

Wouldn't bet the ranch they'll print for the Donald...he's kinda personna nongratta w those FED fellas

halcyon's picture

I can tell you it's gonna be one crowded trade... good luck finding great risk/reward ratio with the price of the puts or spreads.


CPL's picture

Then use direxions x3 leveraged ETF's instead of fucking around with options.

Yog Soggoth's picture

Ehh I'll stick with Dixie investments. Safer and warmer.

CPL's picture

Come on in, the pirhana are fine!! 

X3 trade action based on options pattern trading by an x3 multiplier with leverage.  Hard to not want in on that slice of the market dream. It's how they get so little to move so much with next to no effort in any sector they want on the board.  Writing options against the x3 etf trade action.  That's like mega thermo nuclear trading material and on a market with no volume if you and a whole bunch of people dog piled one of the smaller ones you'd move the entire market sector relating to that industry.

kliguy38's picture

then for sure its the first half