BofA Lists 10 Triggers For The Next Crash: "It's Coming Between Thanksgiving And Valentine's Day"

Tyler Durden's picture

Back in mid-July, BofA's chief investment strategist Michael Hartnett predicted that the "most dangerous moment for market will come in 3 or 4 months." Well, we are now "between 3 and 4" months since that particular forecast was made, and the "most dangerous moment" we have experienced since, ironically, has been today's modest selloff on the 30 year anniversary of Black Monday. So looking back at his forecast, has Hartnett thrown in the towel on calls for a correction, and joined all the other BTFDers? Not quite: instead, Hartnett's thesis has merely shifted, and he now contends that having entered the market's melt up somewhat late, a bubble which as shown before has unleashed raging purchases of tech stocks and credit, especially junk bonds...

... he expects the upside S&P momentum to linger, bursting to 2,670 before finally getting swept under the bubble tide. When will this happen? "We believe sometime between Thanksgiving & Valentine’s Day," or between 1 and 4 months, so even as Hartnett keeps the long-end of his forecast horizon fixed, he continues to expect that the next major move lower may come as soon as 1 month from today. 

So how does Hartnett get to this conclusion, and what specific triggers is he looking for to launch the selling? Before we get there, here is an explanation of why we are where we are right now, i.e., what is the consensus trade.

What is consensus?

The zeitgeist of Wall Street can be summarized as follows:

  • Bullish credit and equities with “Goldilocks” macro conviction
  • No fear of the Fed (or ECB, BoJ…), expectations for a “good” rise in bond yields
  • Long positions in stocks, IG/HY/EM bonds, EAFE & EM equities, banks, a “sellers strike” in tech, shorts in commodities & government bonds…i.e. the death of mean reversion

Following his latest Fund Managers Survey (profiled here earlier this week), Hartnett notes that, obviously, "Clients are bullish risk assets".

This follows a massive rally since the lows of Feb 11th 2016, which has seen High Yield bond yields collapse from 10% to 5% in the US and from 6% to a record low 2% in Europe (Chart 2), the S&P500 soar from 1800 to 2550, likewise the Nasdaq from 4300 to 6600, China H-shares from 7500 to 11500, and the oil price double from $25/bbl to $50/bbl.

 

 

What prompted this massive move higher? Some say it was the Shanghai Accord, where DM and EM central banks sat down behind closed doors and agreed to halt what then was the worst global equity selloff since the financial crisis, and reflated risk assets. Hartnett has a different explanation:

Back in Feb 2016 the “3P's”, Positioning, Profits, Policy, conspired to create a massive buying opportunity of risk assets. The BofAML Bull & Bear Indicator was 0, the definition of “excess bearishness”. Global EPS was contracting 6% YoY in early-2016, and expectations of recession were growing. And then the Fed, ECB, BoJ, BoE and the PBoC all eased: since Feb 2016 G4 central banks have bought over $3tn of financial assets.

Fast forward to today, when in the past 18 months "the global stock market cap is up an epic $18.5tn (>GDP of the US), propelled by wary Positioning in stocks & credit, a strong Profit recovery and the aforementioned monetary (& some fiscal) Policy stimulus. With so many clients desperately in need of a correction (“active” to outperform “passive”, private clients to raise portfolio beta, bond investors to meet future liabilities, sell-side to raise volume & volatility) corrections have proved elusive (the S&P500 has not fallen by more than 5% in 332 trading days)."

However, as we observed just last week, the wary optimism of the past 18 months is morphing into a melt up: a "greater conviction in the bull case for both credit & equity markets." Furthermore, as the latest Fund Manager Survey, Macro expectations of “Goldilocks” (above trend growth, below trend inflation) are now consensus for the 1st time since March 2011.

As a result, long positions in stocks & credit are unambiguous: "Big outperformance of CCMP, BKX, SX5E, more recently NKY, RTY, TRAN all indicate a market leaning very cyclical, and even oil prices are beginning to catch-up. Meanwhile, investors remain stubbornly bearish bonds: the FMS shows just 3% of investors expect lower bond yields in 12 months"

And arguably the most consensus trade of all is “no fear of the Fed”. Investors simply do not believe that aggressive monetary policy tightening is imminent, making “fear of the Fed” a likely catalyst to hurt consensus. Table 1 shows market implied policy rates over the next 1 year & 3 years for the Fed (45bps & 72bps respectively), the BoJ (-1bps & 7 bps), ECB (-2bps & 41bps), and BoE (55bps & 78bps, despite the UK unemployment rate dropping  today to its lowest level since 1975).

 

 

Meanwhile, in today’s poster child for overheating, Sweden, the market predicts just 38bps of tightening in the coming year and 125bps in the next 3 years. Note a starting Riksbank policy rate of -50bps (one the most extreme  monetary policy settings in history), fiscal expansion in 2018 equivalent to 1% of GDP next year, Swedish business confidence at an all-time high, a doubling of Stockholm house prices in the past 10 years, and so on.

All of the above explains how and why the all out euphoria that was launched in February 2016 brought us to where we are: all time highs in the S&P, coupled with ubiquitous complacency, no fear of the Fed, and so forth. So what happens next, or, as Hartnett puts it...

How & when will the Icarus melt-up in risk assets end?

The answer: "Icarus will end with peak Positioning, Profits & Policy stimulus"

According to Bank of America, "we believe sometime between Thanksgiving & Valentine’s Day. We expect >10% correction (say from SPX 2670 toward 2400). Below we list 10 signals of peak Positioning, Profits & Policy stimulus."

Which brings us to Hartnett's "10 Triggers for a >10% correction", which in this environment of record vol-sellers, who would create an instant "selling-begets-more-selling" feedback loop, promptly mutating into a crash.

1.  8: sell when the BofAML Bull & Bear Indicator exceeds “sell signal” of 8; since 2001 there have been 11 BB "sell signals" and hit ratio = 11/11; median MSCI ACWI losses thereafter -5.9% (1-month), -8.5% (2-month), -12.0% (3-month); BB indicator currently 7.4.

2.  4.2%: sell if cash levels in BofAML Fund Managers Survey fall to 4.2% from 4.7% in the next 2-3 months; note the BofAML Oct FMS global equity net OW of +45% has historically coincided with a pause in the equity outperformance versus bonds & cash over next 3 months (Table 2).


3.  63%:
sell when GWIM private client equity allocation exceeds 63% all-time high (currently 60.6%).

4.  $5.4tn: sell when the equity leadership and market cap of US technology ($5.4tn = >MSCI Eurozone & MSCI Emerging Markets) questioned by revenue growth deceleration (revenue at FAANG+BAT stocks = 28% p.a. 2012-16; growth forecast 2017-19 to decelerate only marginally to 24%); sell when GWIM private client FAANG exposure exceeds its 12.9% weight in the S&P500 weighting (currently 9.9%); note US tech within 4% of highest level versus global equities ex-US since 1967.


5.  52:
sell when the US ISM index drops sharply toward 52 (3-month moving average – currently 58.6); peak Profits would also be signaled by a jump in oil prices to $60/bbl, because oil is the last cyclical asset to rally; and of course peak Profits would be signaled by an inverted yield curve (as has been the case in 10 out of 10 occasions since 1952).


6. $15.3tr: sell as we approach March’18,
the month of peak liquidity as measured by the BofAML forecasted level of G4 central bank balance sheets; it will peak at $15.3tr (it’s $14.6tr today, up 4X from $3.6tr in Jun'08); the YoY% growth has already peaked and is set to turn negative in Jan’19.


7.  200bps:
sell when the 10-year spread between Italian & German government bonds rises back above 200bps (currently 165bps); same for Spain (currently 122bps); the ECB has arguably been the liquidity catalyst the past 18 months and a widening of peripheral spreads would indicate their spell over investors is fading.

8.   2018: sell when peak policy climaxes with US tax reform, a classic “buy the rumor, sell the fact” market moment; after tax reform there will be no more stimulus for investors to discount, only monetary tightening in 2018/19; and if tax reform engenders more capital spending that means less money for share buybacks ($3.5tn past 8 years).

9.   1994: sell when inflation threatens 3½% US wage growth & 2½% CPI, levels that will provoke volatility; note a “Goldilocks” bull market ended dramatically in March 1994 with a payroll print of 464K, aggressive Fed hikes (100bps in 3 months); a rout in bonds (Jan-Nov’94 yields jumped 200bps) & a 10% drop in SPX; bear market ended with defaults of Orange County & Mexico…coincided with bond yield highs.

10.  1987/1998: sell when a much sharper 1987/1998 correction is threatened by a “market structure” event, i.e. passive investors, risk parity & quant funds become forced sellers, while vol sellers become forced buyers; ETFs represent $4.25tn globally, 18% of total managed fund industry AUM ($23.4tn) and 70% of daily average global equity volume in 2017; AUM of quant hedge funds now $432bn (up $271bn since 2009), or 14% of hedge fund industry AUM.

Hartnett's conclusion is that assuming no recession, the most obvious catalyst to hurt today’s consensus & incite a big correction is a spike in wage & inflation data that brings back “fear of Fed”. In our view higher bond yields and higher bond market volatility are necessary to engender a major correction in equity & credit markets.

Which, ironically, is precisely the opposite of what Mnuchin said yesterday, when he warned that the lack of a tax reform would crash the market: since it is stimulative tax reform that is precisely the catalyst for higher inflation and a spike in wages, the biggest risk factor for stocks is that Trump ends up getting what he asked for, namely sharply lower taxes, and higher wages, which would force the Fed to drastically accelerate its monetary policy tightening and hike rates much faster. Which is precisely what both Dudley and Kaplan had in mind yesterday when they said that "Trump's Stimulus-Oriented Tax Reform "Could Harm Economy" and Is "Ill-Timed"...

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onwisconsinbadger's picture

Zeorhedge is saying this since 2009. Can you tell me the year when this will happen ?

TerminalDebt's picture

sometiime between now and when the world ends, which will happen soon, so buy gold

Two Theives and a Liar's picture

Gold is essentially created when worlds "end"... I see what you did there ;)

Kafir Goyim's picture

A 10% correction?  I spit on 10% corrections.  Promise me a 50% correction and I'll get interested.

IH8OBAMA's picture

10 market triggers but no mention if you should act when 1 confirms or wait until all 10 confirm.  BoAM isn't noted for being expert market prognostigators so treat this BS with a grain of salt.

 

abyssinian's picture

my cryptocurrency portfolio was up 650%+ in the last 2 weeks, and today took a 12% correction.. Why people still buying rigged stocks is beyond me

 

 

Latitude25's picture

Don't say I didn't tell you to sell that shit before it goes to zero.

BennyBoy's picture

 

BofA New Headline in Mid Winter: "It's Coming Between Valentine's Day And Thanksgiving"

 

VD's picture

& what do they mean by "crash"? anything less than 60% drop and then another 15% is not even a correction, QE/NIRP/buyback adjusted.

Racer's picture

All this bubblicious and crashes talk on ZH today will guarantee the "markets" will soar by the end of today!

LawsofPhysics's picture

LOL!  A primary dealer bank is giving the muppets some advice...

Sure, sure, we will be fucking green by 3:30 PM for fuck's sake!!!

 

"Full Faith and Credit"

CPL's picture

DOW 36000!!!  BULLISH!  Keep printing MOAR JEW CONFETTI!

Son of Captain Nemo's picture

Why can't it be "tomorrow" or perhaps even "today"?...

With the way this is going (https://southfront.org/sdf-to-hand-over-tabiyah-oil-field-east-of-deir-e...) we may have to start things up with "Rocket Man" sooner than we wanted to!

CPL's picture

Free beer tomorrow?!

BTW raging zimbabwe type hyperinflation doesn't happen with crashes.  Remember markets aren't allow to crash, they changed all the laws in 2009 to make shorting illegal without the uptick rule.

Son of Captain Nemo's picture

For "medicinal purposes" to the "petrodollar" and market place only when needed of course CP (https://www.rt.com/news/407165-terrorists-plot-911-attack/)

CPL's picture

You don't get it.  That jackass Barry wired it to only go one direction.  Entire market is driven by bots and algos tied back to PINK pussy. 

They can juggle and manufacture money out of thin air by lending it back and forth between the ten thousand banks still allowed to issue credit based on their charters and licensing.  PINK sheets is full of banks any asshole can pick up for fractions of a penny, best of all they've already been laundered by the system then repackaged for any one to buy.  Say you buy three of them.  Open an account in your newly purchased bank from the pink sheets, then lend another PINK sheet bank a dollar.  The 9 to 1 credit reserve ratio is your best friend here.  You can sit all day long printing money on autopilot by lending money in a big circle to your other banks that you bought for next to nothing also doing the magical 9 to 1 ratio.  Since all those PINK sheet businesses are still legally entitled to the same banking entitlements as a brick and mortar bank.  As to this date, there is no process to delist a bank's ability to print money or to delist a bank.  It's why they all get put into the PINK sheet locker with the rest of the hollowed out companies.

All it takes is buying the controlling share of the stock itself and presto!  You own a bank...for fractions of fractions pennies...all completely legal mind you. 

ReturnOfDaMac's picture

Markets down, it's a dip!  Buy, buy, buy!!

jamesmmu's picture

Another crash in the offing? FT runs this chart that puts 2017 rally into 1929 and 1987 Oct crash perspective.

http://investmentwatchblog.com/another-crash-in-the-offing-ft-runs-this-...

Seasmoke's picture

The Next Crash: "It's Coming Between Thanksgiving And Valentine's Day 2026"  

 

Fixed it. 

TerminalDebt's picture

you have the first digit wrong

Eagle40's picture

After reading your comment you made my day. I was laughing for minutes. So true in what you say and I agree. Mixing reality with comedy made this the best comment on this site today. However I would recommend changing the first digit from a 2 to a 3. Lol. I would bet by 3026.  

PontifexMaximus's picture

me think, BofA is kidding us

Atomizer's picture

You can wish for Dow 24,000. Your USD is being debased. The value of your stock is a illusion. 

Pixies - Debaser - YouTube

 

TerminalDebt's picture

yeah, buy gold buy gold, because you can eat yellow shiny shit

Latitude25's picture

Enjoy chomping on your delicious joobucks and treasusuarys.

44_shooter's picture

It’s gonna burst on Tuesday...

Stupid fucking predictions - and stupid fucking ZH for continuously printing prediction articles.

Megaton Jim's picture

So, go read the Huff N Puff Post, you dimwit!

mily's picture

"Back in Feb 2016 the “3P's”, Positioning, Profits, Policy, conspired to create a massive buying opportunity of risk assets. The BofAML Bull & Bear Indicator was 0, the definition of “excess bearishness”. Global EPS was contracting 6% YoY in early-2016, and expectations of recession were growing. And then the Fed, ECB, BoJ, BoE and the PBoC all eased: since Feb 2016 G4 central banks have bought over $3tn of financial assets."

Uh oh, so it is not a conspiracy theory anymore?

Megaton Jim's picture

I thought they said it was due this month?!?

aliens is here's picture

BoA and other big mega banks are triggers of the next crash. Fools.

Vardaman's picture

At least the drooling "end times" bible whackers pick an exact date and then "change their minds" the day before.  Stuff like this leads me towards finding other ways to waste my time than reading ZeroHedge...

disagreeableness's picture

For those sophisticated enough to understand the wisdom of diversifying into crypto, and who meet certain abilities criteria, I invite you to to apply for investor consideration in the most exciting evolution of Blockchain EVER! DIPCOIN! That's right, with proprietary code this revolutionary product puts risk on the Blockchain. You've heard the term "distributed ledger", you know it's great, but you've no idea what it means. Well now, just there, on the horizon is your GF opportunity to be a part of the most important development in nvestmentnt technology of the 21st century: distributed liability! Let me assure you, your instincts are right on this one. This is one time in your life that FOBLO is your friend. What are you going to tell your grandchildren about DIPCOIN? That you were a sideline sitting pussy? Or that the enormity of your balls was overshadowed only by the long shade of your proud cock? You know what to do here. ICO will be a three day event, anticipated start date somewhere between Thanksgiving & Valentines Day. 

Shpedly's picture

Where the hell is Laszlo Birinyi and his magic ruler to refute this hogwash article?

Rebelrebel7's picture

The central banks seem very anxious to get the people on board with the destructive cycle of the central bank scam, since the very nsture of a debt based monetaty systerm has only two options,  issue more debt, or destroy asset prices, since the currency is created when debt is issued, but the interest required to pay that debt IS NOT CREATED, always leaving a shortfall in the money supply of all interest due by nations, local  and state governments, corporations, and individuals. 

The banks can have all of those loans defaulted on, or destroy asset prices at least once every decade. One recent Zero Hedge  article by Dana Lyons pointed out that the central banks for some reason decided on all years ending in seven for the destructive cycle. I guess that would make all years ending in 6 a great time to exit, in line with the 666 policy. 

http://www.zerohedge.com/news/2017-10-17/can-stocks-avoid-unlucky-year-n...

 

It's time to end the Fed.  Its us, or them. I choose us!

Iconoclast421's picture

It takes at least 6 weeks post all time high for there to be a crash. So that already rules out thanksgiving.

Herdee's picture

The're caught in a major deflationary force downwards.  We're in a depresssion but with that you can have rallies which make it appear that everything is doing well.  You have to understand that we are on life support.  You can't check out of The Roach Motel easily.   They've got two choices, wash out all the bad debt and put us into a major depression or go for hyperinflation.  You guys know the corruption in Washington, they're bust, so they'll rake the easy way out.  It'll look like manna from heaven. 

adamas's picture

The reason the market is continuing to advance is because no one is in the market , yet they're all screaming for an imminent crash.  It ain't going to happen guys,  maybe in one or two years after another blow off top as all the ZH's capitulate and buy in at 33,000 prior to the 50% crash from 35,000.. or something like that... but it won't crash UNTIL YOU'RE IN THE MARKET 

Bemused Observer's picture

Oh, they're waiting for me? Well, I hope they packed a lunch and a change of clothes, because they're gonna be waiting awhile.

 

I wouldn't even put fake money into this 'market'...even OTHER PEOPLE'S fake money.

Rex Andrus's picture

What form will the false flag take in this time?

CoCosAB's picture

it comes 12/04/2017!

Muppet's picture

Always the when