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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).