A bear market rally could be in the offing, but investors should ‘sell any rips,’ Bank of America says

Despite the extensive losses seen in stock markets so far this year, it’s not over ’til it’s over, and investors should continue to sell if there are big bounces to the upside.

That’s the advice from a team of Bank of America strategists, led by Michael Hartnett, in their “Flow Show” note on Friday. At the bank’s focus is the growing debate over whether the market has capitulated, meaning investors are essentially giving up trying to recoup lost profits.

Some strategists see the capitulation as a sign that the market has bottomed and a good time to buy stocks. However, even a near 1,200 point drop in the Dow Industrials DJIA,
+0.03%
earlier this week, a bear market for the Nasdaq Composite COMP,
-0.30%
and a close one for the S&P 500 SPX,
+0.01%
You haven’t convinced everyone that the sale is over.

Stocks rose on Friday morning, but the major indexes were still poised to add to a series of weekly losses.

Read: Technician who rated 2020 market bottom says ‘shocking rally’ ahead

Bank of America noted that high levels of cash for investors (it reported earlier this week that global fund managers’ cash allocations were the highest since 2001) and its own bullish/bearish contrarian indicator point to capitulation. .

BofA Global Research

But other pieces of the puzzle are missing, they said. For example, the bank’s institutional and private client flows are not at capitulation lows. Among its private clients with $2.9 trillion in assets under management, 62.8% is allocated to equities (the lowest level since February 2021), 18% to bonds (the highest level since July 2021 ) and 12.1% in cash (the highest level since January 2021).

Of course, they point out, there is no “true capitulation” involving the Fed in sight. That tends to mean a massive market pullback causing the central bank to relax monetary policy tightening. A systemic event and an increase in the unemployment rate would be required first, Hartnett said.

BofA Global Research

The bottom line is that the stock market is “highly vulnerable to [a] bear rally, but we’d still argue ‘sell any rips,’ said Hartnett and team.

One more thing investors should keep in mind, the declines of the last 40 years have involved a rapid acceleration of the Japanese yen USDJPY,
+0.05%,
they note:

BofA Global Research

Read: How long is the average bear market? Selloff leaves Dow, S&P 500 near threshold.

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