Why Despite Today's Market Surge, Bank of America Stubbornly Refuses To Join The Rally

Yesterday, it was risk off, and the litany of complaints aimed at "Blooper Mario" and the ECB's disappointment was relentless; then after supposedly "reassessing" what the ECB really announced, we have shifted to a global risk on euphoria and this morning pundits can't find enough praise for "Super Mario."

And yet one strategist refuses to flop to yesterday's flip: BofA's credit strategist Michael Hartnett, who has been urging to sell this rally for the past few weeks, and who continues to do so today. Here's why.

  • Central banks spur risk-on: in run-up to ECB/BoJ/Fed flows risk-on, particularly in credit...bond inflows ($6.1bn), equity inflows ($4.5bn), gold inflows ($1.0bn) and Money-Market outflows ($3.6bn).
  • Inflows to "weak dollar" plays: 2016 consensus "long dollar" view cracking...largest inflows to EM debt in 12 months, 1st  inflows to EM equity funds in 5 months, largest 3week inflow to High Yield bond funds in 3 years, 9th consecutive week of inflow to gold funds (longest streak since 2012).
  • Outflows from "strong dollar" plays: largest 5-week outflows from European equity funds in 16 months (Chart 2).


  • Sell signal from Global Flow Trading Rule: significant High Yield inflows & rising equity inflows (4-week risk inflows = 1.3% of AUM - Chart 1) trigger contrarian “sell” signal for risk assets; rule currently recommends "take profits" rather than outright short as US ISM is currently improving, not deteriorating.

  • Highest (5.6%) cash level since Nov'01 in Feb Fund Manager Survey was unambiguous trading "buy signal": but oil/EM/resources/credit/banks/small cap/cyclicals have rallied big since Feb 11th (when FMS closed).
  • ECB gave all they had today (rate cuts/QE/credit purchases) but price action screamed "Quantitative Failure"...gold and volatility outperformed.
  • Risk assets about to top: ultimately markets about "rates" and "earnings", little else; central banks have played “rates card” as aggressively as they can; ECB done, BoJ has nothing in the tank, and any US macro strength will elicit Fed rate hike expectations (the Fed wants to tighten); EPS momentum simply not strong enough near-term to overwhelm Q2 risks of Brexit, BoJ failure, US politics, China debt deflation.
  • There remain good investments, e.g. gold, US IG, defensive growth stocks in US, dividend yield in EU/Japan, "global peripheral debt" (i.e. EM debt), the "long Main St, short Wall St" theme, "best of breed" in EM (buy the best assets in the worst places); but nearterm risk-reward in assets markets once again looks poor.