"Is The Bottom In?" - BofA Answers The Question Everyone Is Asking

On Wednesday, as the Dow Jones plunged by over 550 points and the S&P dropped by 15% from its all time highs seen last summer, many speculated - most notably Tom DeMark - that the relentless selloff had finally hit an "interim low", and was due for a rebound as much as 8%. Events since then have so far validated this forecast. 

However the one question on everyone's lips, is whether aside from a "interim low", was Wednesday's flush the market's lows for the foreseeable future, and certainly for the first quarter.

Bank of America responds.

According to its strategist Michael Hartnett, while the January lows may indeed be in for the following reasons...

Breadth Rule in "buy" territory (95% of mkts <200 & 50dma); FMS cash jumped to 5.4% in Jan (3rd highest since 2009); uber-crowded trades of long peripheral Euro-area debt, long Euro-area banks, long NKY, long FANG (FB, AMZN, NFLX, GOOG) spanked; capitulation in “Illiquid” yield plays (EMB, HY, MLPs); massive outperformance (6.8% YTD) of “long duration, short risk” CTA’s (Chart 2).

 

....the Q1 lows are not in. Here's why:

  • Jan Fund Manage Survey shows investors still OW stocks
  •  China/EM/oil/commodity “event” yet to create “entry point” into distressed assets
  • long US$ trade yet to be unwound via a short-end collapse/Fed priced-out
  • GWIM not yet in risk-off mode (Chart 3)

  • SWF’s have plenty to unwind (AUM $7.2tn of which $4.4tn is in oil producing nations).

As a reminder, there are just 6 trading days left in January, which means both DeMark and Hartnett may be spot on in the "bottom is in" for January forecast; it is after January that things get ugly again.

But it was Hartnett's conclusion that is most damning:

Positioning jerkily, reluctantly adjusting to 2016 bear market & profit recession:

  • note 10-year rolling loss from commodities (-3.5%) currently worst since 1938
  • EM currencies trading 15% below their 2009 lows
  • yield on US HY bonds up from 4.9% to 9.8% in the past 18 months
  • equal-weighted US stock index down 25% from recent highs
  • 1638 global stocks (2/3 of the MSCI ACWI) down >20% from their peak
  • global profits (MSCI ACWI) currently falling 8.0% YoY.

 

Price action shows policy impotence & Quantitative Failure:

  • since Japan expanded ETF purchases Dec 18th the Yen is +2.9%, Nikkei -16.6%
  • since ECB cut rates Dec 3rd the Euro is -1.1%, Euro Stoxx 600 -11.6%
  • and since Fed hiked on Dec 16th the S&P is -9.4%
  • 2yr yields are -18bps, 10yr yields -29bps.

Lacking true Positioning shake-out, lacking catalysts for Profit turnaround & lacking visible Policy panic, we remain “sellers into strength” of risk assets

Summarizing BofA's chief investment strategist: enjoy the relief rally, it won't last.