Tuesday, 15 May 2018 16:20

"Buy In May And Sell The Rip": Wall Street Gives Up On "The Recovery", Hopes For One Last Market Bounce

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While Wall Street investors may be clinging to hope that central bankers won't screw up the tightening process, i.e., commit a "policy mistake", which as we showed earlier is the biggest tail risk on Wall Street today... 

... and won't blow up what is by now the biggest consensus position perhaps in history, namely everyone (including the Harvard Endowment) being long FAANG+BAT...

... Wall Street has now given up on the so-called "coordinated global recovery", and as BofA's Michael Hartnett reveals in his latest Fund Managers Survey polling 223 respondents with $643BN in AUM, expectations for faster global growth have collapsed, with only net 1% of investors indicating in May they think the global economy will strengthen over the next 12 months.  This is down 4% from April and the lowest level since February 2016 when the S&P hit an intraday low of 1810 and when global economy was just emerging from its China-deval/Quantitative Tightening led turmoil. The fact that this is happening now when both the economy and the markets have been firing on all cylinders is especially troubling.

Looking ahead, while only 18% expect a recession in the next 12 month, (and 2% expect it in 2018), a fully 84% are now confident the next recession will hit in the next two years, either in 2019 (41%) of 2020 (43%).

Meanwhile, looking at positioning, BofA notes that the market froth is now gone, expectations have reset, cash remains high explaining the May rally, but consensus still positioned for risk-on and expects: "good" rise in rates, no recession until 2020’Q1.

To this, BofA's response is "Buy In May And Sell The Rip" as growth and credit weakness will be the likely triggers for the next move lower. Here is Hartnett:

"This month’s survey presents good and bad news,” said Michael Hartnett, BofA chief investment strategist. "Although cash levels remain high and growth optimism is at the lowest level in over two years, a majority of investors say there is room to grow in this equity bull market and don’t see signs of recession anytime soon. Fund managers think the May rally can extend in the near-term.”

Meanwhile, here are the other notable observations from the latest Fund Manage Survey:

Average cash balance ticks down to 4.9% in May, from 5.0% in April, but still above the 10-year average of 4.5%, continuing the FMS Cash Rule contrarian "buy" signal. This also means that the near-term BofAML Bull & Bear Indicator is more neutral now at 4.8 (close to the midpoint between the 2.0 “buy” and 8.0 “sell” thresholds). This is the good news, although it the June FMS cash falls

The not so good news is that while funds still have dry powder on the side, and are looking for a near-term bounce, Hartnett notes that the bank's proprietary Global FMS...

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