Why Bank Of America Remains A “Seller Of Risk”

It is not only BofA’s “smart money” clients who have been selling the rally non-stop (and at an accelerating pace) for the past 10 weeks: so has the bank’s chief investment strategist, Michael Hartnett, whose reluctance to embrace the mania has been duly documented on these pages.Below we lay out the reasons why he “remains a seller of risk.“

From his latest summary note:

Positioning…Sell Signal: our Global Flows Trading Rule triggered “sell” almost 4 weeks ago; note BofAML Bull & Bear Index now at 4.1 = 9-month high = most bullish sentiment since Jun’15;

Watch Cash level in next Tuesday’s April BofAML Fund Manager Survey (Feb = 5.6% “unambiguous buy signal”, March = 5.1%, April < 4.8% (3yr avg) would be risk-negative).

Positioning…US$ Bull Unwind: Fed-induced pullback in US$ continues to cause unwind of 2015 inflows into “strong-dollar” markets…Japan equity redemptions have lagged European equity redemptions (Charts 5 & 6).

Policy…Quantitative Failure:

a. Fed policy makers as fickle “as a feather in a storm” but key US domestic demand indicator, small business confidence trending decisively lower (Chart 4)

b. Quantitative Failure writ large across Japan/European macro

c. global bank stocks (note correlation between Japanese yen & relative performance of US financials past 12 months…both recently reflecting renewed risk aversion – Chart 3)

Profits…Upside Required: both 2016 GDP & EPS estimates continue to be revised lower (Charts 8 & 9) despite monetary policy inducing $9.1 trillion of negatively-yielding global government bonds (25% of outstanding).