All signs point toward a bear market rally in the near term, says Bank of America’s Chief Investment Strategist Michael Hartnett.

Results of the bank’s Global Fund Manager Survey (FMS) are “extremely bearish” with the highest cash levels since 9/11, biggest tech “short” since August 2006, and biggest equity Underweight since May 2020. Moreover, BofA Bull & Bear Indicator is at 2.0, which is a contrarian buy level.

This list could go on. While global growth optimism remains at an all time low, fear of stagflation continues to rise since GFC. Hartnett says that fund managers have been pushing CEOs to balance out and avoid buying backs or capex.

“68% expect inflation rates to drop coming quarters, fewer and fewer (net 34%) expect bond yields to rise, but big difference with prior “big lows” Is 78% expect short rates to rise; FMS Fed “put” is 3529 on S&P500 (-12% from current levels),” the strategist wrote in a client note.

The No.1 risk when it comes to tail risks is the hawkish central bank, which outranks inflation and recession.

“Investors are very long cash, commodities, healthcare, staples, and very short tech, equities, Europe, EM; allocation to tech lowest since Aug ’06, to defensives on par with GFC, Euro-crisis, COVID-crisis levels, allocation to stocks lowest since May ’20 (but not as low as prior crisis levels),” Hartnett added.

Stephen Suttmeier (NYSE: Chief Technical Strategist) added that the technical indicators pointed to a rebound in equities.

“The (SPX) has dropped in each of the last six weeks. This scenario suggests that the SPX will be up 81% the following week on an average return 0.94% (1.51 median). This bodes well on a tactical basis after the Friday’s (5/13) 90% up day… Demark indicators generated bullish daily 13 downside exhaustion signals near supports on the SPX, NDX and RTY last week. These signals are a confirmation of the potential for rebounds at tactically oversold levels. The 3-month vs VIX, 5-day put/call and percentage of stocks above 10-day MAs did not confirm last week’s lower lows for the key equity indices. These positive divergences also support the case for a tactical rally,” Suttmeier wrote in a separate note.

The Bank of America’s equity client flows trends showed that the past week saw the largest retail outflows within a single year. Hedge funds and corporate clients bought stocks, on the other side.

“Retail and institutional clients were net sellers (for first time in 4 weeks and for the second week, respectively). Sales by retail were the largest in a year and the 12th largest in our data history (since ‘08). While our work suggests that retail flows have been positively correlated with subsequent near-term market returns (retail is not a contrary indicator-note), weeks of similarly or more extreme retail outflows have been followed by positive 4-week S&P 500 returns >90% of the time (vs. positive 4- week returns for the index 64% of the time over same period since ‘08),” strategist Jill Carey Hall told clients in a memo.

By Senad Karaahmetovic