“Mood No Longer Apocalyptic”: Wall Street’s Most Accurate Strategist Says Start Shorting S&P Now
One month ago, with market pessimism at “dire” all-time highs, the mood on Wall Street was so apocalyptic, and sentiment so capitualitory that when looking at the monthly (July) Fund Manager Survey, even BofA’s uber-bearish Chief Investment Strategist, Michael Hartnett turned bullish correctly timing the face-ripping, short-squeezed, stock-buybacked, retail-invested, CTA-chased meltup. This is how we summarized Hartnett’s findings,
“the strategist writes that ‘H2’22 fundamentals poor but sentiment says stocks/credit rally in coming weeks” and adds that the “contrarian Q3 trade is risk-on if no Lehman, CPI down, Fed pause by Xmas…short cash-long stocks, short US$-long Eurozone, short defensives-long stocks banks & consumer.”
Once again, Hartnett – who over the past year emerged as Wall Street’s most accurate analyst- was spot on, and more importantly, unlike his JPM peers who tell clients to buy every single week oblivious to being called out for total hacks, Hartnett actually timed the pivot just right.
Which brings us to the latest – August – Fund Manager Survey, in which Hartnett polled 284 panelists with $836BN in AUM (full reported available to professional subs), and in which he finds that while sentiment remains uber-bearish – with the BofA Bull & Bear Indicator still at a “max bearish” reading of 0.0 = suggesting no immediate reversal of the bear market rally…
… Hartnett also finds that the mood is “no longer apocalyptically bearish” as hopes rise that inflation & rates shocks end in coming quarters…
… and while the meltup can continue for a little bit longer – at least until Powell flips out about the market blowing his entire plan to tighten financial conditions – Hartnett remains a patient bear, and says he “would fade SPX >4328 as rates up-profits down our base case.” Coming from the guy who just happens to be Wall Street’s most accurate analyst and exactly one month ago correctly predicted “sentiment says stocks/credit rally in coming weeks” we would listen to what he has to say.
As always, the full FMS is full of 28 pages of informative datapoints (if mostly contradictory) available to pro subs, but here we summarize some of the key findings which show why the apocalyptic mood has eased just a bit:
FMS on macro & policy: both growth expectations (net -67%)…
… global profit optimism…
…. and equity allocation (net -26%)….
… rose from dire July lows. Meanwhile (“skinny”) recession as consensus as it was in Mar’09 & Apr’20 and ’09…
… so 88% of investors expect lower inflation next 12 months…
… and fear of draconian hikes subsiding (Fed Funds hikes of 100-125bps forecast).
FMS on risk: cash drops from 6.1% to still very high 5.7% and well above the long term average of 4.8%.
#1 “crowded trade” = long US dollar:
#1 biggest “tail risk” = inflation stays high:
#1 catalyst for Fed “pivot” = US PCE inflation <4%:>4%:>
#1 source of “systemic credit event” = China/global real estate.
FMS on asset allocation: FMS positioning still “long stagflation” (commodities, cash, defensives)…
… “short Goldilocks” (EU/EM stocks, consumer)…
… but big Aug rotation to US stocks/tech/consumer, out of staples/utilities/UK; notable FMS investors for 1st time since Aug’20 say growth stocks to outperform value next 12 months.
For those seeking contrarian trades to the current euphoria, Hartnett recommends a contrarian bull trade (as services inflation falls, new credit bull begins) = short US$, healthcare & long EU, EM, banks, resources; meanwhile the contrarian bear trade (Wall St & labor market inflation, Fed funds 4-5%, hard recession ’23) = short US stocks, growth stocks (tech), REITs & long staples, utilities.
But while all that may work, the most important take home from Hartnett’s latest FMS is that just as he nailed the meltup one month ago, so his latest reco – to fade the SPX at 4,328 – may prove to be spot on as well because moments ago, eminis rose to a session high of 4,327.5… and reversed.
Is that the start of the next wave lower in risk assets? Check back in one month.
Much more in the full report available to pro subs.
Tue, 08/16/2022 – 14:30