Bank of America: "Tick Tock"

The drums of doom from BofA's Michael Hartnett (most notorious for his recent prediction of when "the Fed will crash the market", and warning that "The Most Dangerous Moment For Markets Will Come In 3 Or 4 Months") are beating louder, and in his latest Flow Show report titled "Tick Tock", he doubles down on his recent forecast that "positioning is becoming more consistent with autumn top in risk assets", but more importantly than just making a forecast, Hartnett lays out the key catalysts that would confirm an imminent market "crack": a dollar swoon (DXY < 90), unambiguous US labor/consumer weakness (payroll <100K) and flatter yield curve.

In terms of recent market moves, Hartnett points out the euphoria still is prevalent, with BofA's proprietary Bull & Bear indicator now 7.6, edging up toward "sell" level of 8...

... now just shy of euphoria territory:

... as "active" equity funds have seen the biggest inflows since 2014.

So why "tick tock"? Below, Hartnett lays out his negative views, familiar to those who have been following his "Icarus" thesis which expects stocks to surge in the summer, rising as high as 2,600 before tumbling:

Positioning becoming more consistent with autumn top: Bull & Bear indicator now 7.6, edging up toward "sell" signal of 8 (trigger = further strong inflows to HY, EM debt, active equity plus drop in FMS institutional cash); private client cash levels at record lows.

 

Disobedience of central banks: stocks rally in defiance of Fed's promise to reduce balance sheet (Chart 2); central bank disobedience classic euphoria signal.

 

 

 

Little fear of Fed: balance sheet reduction likely Sept 20th not leading to higher rates/yields as QE has not led to inflation; latest core inflation rates likely lowest most investors have witnessed in their careers…-0.4% in Japan, 0.2% in Switzerland, 1.1% in EU, 1.4% in US, China, India & Canada.

 

Little fear of Humpty-Dumpty: investors replacing "Icarus" skepticism with skepticism over "great fall" in markets H2; negative surprise for investors now more likely weak GDP/EPS than Quantitative Tightening.

 

Lodestars: sharp weakness in US dollar (6-month decline of DXY biggest in 6 years) maybe harbinger weaker H2 activity; but yield curve needs to flatten another 50-75bps to incite narrative of yield curve inversion, recession (Chart 3)...

 

 

... wider spreads, higher volatility (Chart 1).

 

Finally, this is how to know that the "crack" moments have arrived according to Hartnett:

August crack: we have penciled in autumn top; August crack in markets requires dollar swoon (DXY to 90) to coincide with unambiguous US labor/consumer weakness (payroll <100K) & flatter yield curve; end of "high yield" leadership should be early warning system, as would fatigue in equity "growth" leadership (QNET, EMQQITR, SOX).

Comments

FatTony7915726 (not verified) Fri, 07/28/2017 - 11:48 Permalink

Is that a speedometer?  Madame Yellen the motorcycle cop will give the goy a ticket!

enfield0916 The_Juggernaut Fri, 07/28/2017 - 15:06 Permalink

The gravy trian will keep running ONLY until the Chinese are able to convert the USAA's JUNK bonds into hard assets. Like the JP Morgan tower that they bought in Manhattan for pennies on the dollar. That building has a HUGE gold vault in it's underbelly.Once the conversion of bonds to hard assets isn't possible, there comes your much awaited global reset and a world wide switch to a monetary system based on precious metals.Why do you think China and Russia are hoarding gold like madmen?

In reply to by The_Juggernaut

Turin Turambar Fri, 07/28/2017 - 12:03 Permalink

If the experts expect a crack in August, then the contrarian in me expects there to be new all-time highs in August.  One last chance for the manipulators to squeeze shorts and pocket put premiums before things really begin to unravel.  My guess would be September or October, then a December ramp to reclaim whatever amount the algo's can ramp up to increase end of year bankster bonuses.

Deep Snorkeler Fri, 07/28/2017 - 12:08 Permalink

No Recession/No DepressionThere Will Be No Crash1. Everyone says a crash is coming therefore it can't happen.2. Oil price too low.3. Interest rates too low.4. Military victory in Afghanistan imminent.5. Marijuana sales surging.6. Economic data is gender fluid (unfirm).7. Trump is our shining sword of orgasmic capitalism. 

artvandalai Fri, 07/28/2017 - 12:41 Permalink

I will say that it is a bit strange that the market doesn't seem to care what the Fed is going to do anymore. It used to be that if they some of the fedheads even changed a nuance in their speeches that hinted at tightening the market would throw a hissy fit as the next FOMC meeting approached.

Iskiab Fri, 07/28/2017 - 12:51 Permalink

Crashes are inevitable, it's just a matter of when... but then again who knows how the algos are programmed. Someone with enough capital and savy could manipulate the market to react how it wants. Give support when needed and the rest of the algos will do the rest. Then trigger a sell when convenient.

Humans are irrational, algos are not and I'd bet the majority are set to follow the herd.

CJgipper Iskiab Fri, 07/28/2017 - 12:57 Permalink

Are they?  It's been a decade since the last crash that we never did anything to actually recover from except lay on even MORE debt.  It was only 7--8 years between 2000 and 2007/2008.  We're at TEN freaking years now.  With this much printing, I'm not sure this crash wont' be a melt UP.

In reply to by Iskiab

idontcare Fri, 07/28/2017 - 14:24 Permalink

Reality is the Nasdaq composite is extremely bubblicious.   On the other hand, except for the most widely held names in the Dow/S&P, there are a lot of companies which are not "toppy" even in this market which just might be rotated into come a bubble bursting event.

polo007 Fri, 07/28/2017 - 17:12 Permalink

http://www.reuters.com/article/us-imf-currencies-idUSKBN1AD1YT?il=0IMF says US dollar overvalued; euro, yen, yuan broadly in line with fundamentalsWASHINGTON (Reuters) - The International Monetary Fund on Friday said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan's yen, and China's yuan as broadly in line with fundamentals.The IMF's External Sector Report - an annual assessment of currencies and external surpluses and deficits of major economies - showed that external current account deficits were becoming more concentrated in certain advanced economies such as the United States and Britain, while surpluses remained persistent in China and Germany.While the report assessed the euro's valuation as appropriate for the eurozone as a whole, it said the euro's real effective exchange rate was 10-20 percent too low for Germany's fundamentals, given its high current account surplus.Britain's pound, meanwhile, was assessed as up to 15 percent overvalued compared to fundamentals, which include a high level of uncertainty over Britain's post-Brexit trading relationship with the European Union.The Fund said the dollar's appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump's administration. But so far this year, the dollar index, .DXY the broad measure of its value against other major currencies, is down more than 8 percent this year and is off to the worst start to a year since 2002.The IMF recommended that U.S. authorities take steps to shrink a current account deficit that remains too large, by reducing its federal budget deficit and passing structural reforms to increase the savings rate and improve the economy's productivity."It's important to address imbalances, because if they're not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism," IMF Research Division Chief Luis Cubeddu told a news conference.Cubeddu said that the persistence of current account surpluses in export countries such as China and the growth of deficits in debtor countries such as the United States suggested that the problem would not clear up automatically."That is, prices, savings and investment decisions don't seem to be adjusting fast enough to correct imbalances. This partly reflects rigid currency arrangements, but also certain structural features, like inadequate safety nets, barriers to investment, which leads to undesirable levels of savings and investment," he said.

Blankfuck Fri, 07/28/2017 - 19:44 Permalink

But But ....I have read all this in a different way but same premise, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year, last year, the year before that year, and  before that year............. How much is our fucking debt again?  Where did those printed bills all go? Could it be in the hands of the fed rerseve fuckers? banker fuckers? ceo fuckers?

JailBanksters Fri, 07/28/2017 - 21:27 Permalink

I thought BOA was going bankruptI guess they created enough money out of thin air to buy their own stock to pump up their own stock price,and boom, no longer going bankrupt.