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.

It goes on. The global growth optimism has dropped to an all-time low, while the fear about stagflation has reached its highest level since the GFC. Hartnett adds that these factors are causing fund managers to push CEOs for better balance sheets, and less capex and buybacks.

“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.

There are three main risks to consider when assessing risks: hawkish central banking, followed by inflation, recession and geopolitical risk.

“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 is the Chief Technical Strategist of Bank of America (NYSE). He said that technical indicators indicate a rise in equities.

“The (SPX) has dropped in each of the last six weeks. The SPX is expected to rise 81% in the coming week, with an average return of 0.944% and a median of 1.51%. 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 indicate the possibility of rebounds from tactically high 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.

Last week was the most significant inflow of equity clients to Bank of America. However, corporate clients and hedge funds were purchasing stocks.

“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