"When Will It End?" BofAML's 10-Point Checklist

So "when will it end?" BofAML's best guess remains sometime in the summer.

The current rally started in February 2016 on the 2nd day of Yellen's Humphrey-Hawkins testimony. The inflection was caused by a. uber-bearish Positioning, b. uber-bearish profit expectations, c. Policy easing. And thus BofAML believe the rally will end with a. bullish Positioning, b. bullish Profit expectations, c. Policy tightening.

We’re not there yet.

Here's Michael Hartnett's checklist of Positioning, Profit & Policy data to indicate we are in the Last 100 days of the rally, perhaps also the Last 100 Days of the secular upswing that began in March 2009:

Extreme bullish Positioning would be signaled by...

1. BofAML Bull & Bear indicator (up from 0 in Feb’16 to 5.3 today) >8; VIX approaching all-time low reading of 9.3 (Dec’93)

2. BofAML Global Flow Trading Rule triggering risk “sell signal" following high yield bond & global equity inflows >1% AUM in 4 weeks

3. BofAML Global Breadth Rule signaling “overbought” with 90% of MSCI markets trading >200-day & 50-day moving averages

4. BofAML FMS cash levels <4% (currently 5.1%, down from 5.8% in Oct); BofAML GWIM asset allocation to equities >64%, i.e. at new highs

Extreme bullish Profit expectations would be signaled by...

5. US ISM >58, i.e. a level above which EPS growth normally peaks (e.g. 1997, 1999, 2003, 2014)

6. Surge in wage data (e.g. US average hourly earnings >3%) or producer prices (>2%, PPI’s now positive in developed markets for first time in 2 years) that hurt margins

7. Markets signaling “peak macro” via US high yield bond spreads (currently 400bp) dropping below 350bp; real rates jumping roughly 100bps in the next 6-9 months

 

Policy hawkishness would be signaled by...

8. Bear flattening of yield curves as markets discount Fed playing catch-up (see Investment Clock analysis Chart 5); rate volatility (MOVE index >90)



9. ECB & BoJ QE tapering announcements

10. Fed announces an end to the "reinvestment" of their balance sheet (Chart 6) which would be the big signal that the QE era had come to a close, and is likely to become a much bigger story for markets as the year progresses

The Big Top

At this stage we see the potential in 2018 for rising rates & falling EPS, a complete reversal of the era of falling interest rates & rising profit margins that has caused risk assets to do so stunningly well since 2009. In the absence of an acceleration in labor productivity, the incoming President will find it tougher to engender the 2nd greatest bull market (2870), or the greatest ever (3504 - although should Trump match the historic 1st term annualized equity gain of 11% p.a. then 4 years of Trump would take the S&P500 to 3480.), or the longest ever (Sept 1st 2018). More likely risk assets will make a major top later in 2017.