"Own volatility.." is the subtle message from BofA's Michael Hartnett, who warns "don't add risk before SPX 1950-2000 range and/or VIX>20." Simply put, as he explains below, bullish "positioning shocks" & "policy shocks" are largely behind us; and there is no bullish "profits shock" coming in a world that cannot cope with a higher US dollar & higher rates.
2016 YTD global total returns: commodities 7.6%, bonds 7.5%, equities 1.1%, the US dollar -5.8%.
Our base case remains:
End of excess liquidity + end of excess profits = end of excess returns = higher weightings in cash, volatility & gold in 2016
Shift from "raging bull" (2009-13) to ‘sitting bull” (2014-15) to “volatility bull" (2016) reflects: a. low probability of Higher EPS & Lower Rates, and, b. redemption, repression, regulation risks
Positioning + policy correctly caused Feb-April risk-rally; post-March we have been sellers into strength; case for volatility once again rising driven by the “3P’s” of Positioning, Policy & Profits
The bullish “positioning shock” is largely behind us: our BofAML Bull & Bear index has jumped from an uber-bullish 0.1 level in Feb to 5.1 today, an 11-month high (Chart 5); cash levels, which were at 15-year highs in Feb according to the BofAML FMS, are falling as investors rotate from cash to corporate bonds; BofAML private client equity allocation is back up to 59% (up from 56% in Feb’16, albeit below all-time high of 63% in Mar’15).
The bullish “policy shock” is largely behind us: the policy “panic” of Feb & March was ended with the BoJ decision last week to disappoint market expectations of further easing; Quantitative Failure stalks Japan (see yen surge and unbelievably low level of JGB yields - 0.31% for the 40-year yields; debt deflation stalks China (watch CN0C Index); and while the ECB is limiting credit spreads, recent ECB actions have coincided with higher euro, not higher bond yields, bank stocks & inflation expectations; meanwhile Fed willingness to raise rates likely will continue to create fear of “events” (Chart 6). The likelihood of a Trump-Clinton election match-up supports our Main Street versus Wall Street theme. Both candidates state support for the working class versus the rich.
There is no bullish “profit shock”: global EPS (Chart 7) & global GDP forecasts continue to be revised lower; good, reliable, cyclical lead indicators, e.g. the SOX index, are rolling over/heading back toward floor of 18-month range; and the decline in US corporate profits has extremely ominous implications for US payroll numbers in coming months (consensus looks for 200k on Friday). Watch credit: the global high yield index (HW00 Index) is approaching all-time highs; a break above 330 would be risk-on, but we think credit fails to hit new highs.
And finally, ahead of tomorrow, we note that profits portend weaker payrolls...