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27 May, 2022 12:28

Summer bear rally bandwagon on the move on 'peak inflation' talk, BoA says

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Bank of America branch in Palm Beach, Florida (U.S.A.)DL (AB)

It's off to the races with a summer bear market rally bandwagon growing, one of Wall Street's top-rated strategy teams said.

Using their 'bear-bull' contrarian market indicator, which during the latest week had fallen from 1.5 to 0.6 on a scale of 1 to 10, they surmised that the "price was now right" given the broad-based declines in risk assets from their recent highs.

That was the indicator's second consecutive weekly move into "unambiguous contrarian buy territory" and it wasn't just a function of price declines.

It was about a possible peak in inflation and a Fed "pause" against a backdrop of a bevy of assets that were now oversold relative to their 200-day moving averages, the Bank of America team led by Michael Hartnett said in a research note sent to clients.

Were there any flies in the ointment? Yes, the "sneaky" new high in oil prices which tarnished the "peak inflation" narrative.

On the flip-side, levels of volatility in the US Treasury market, which had been the epicentre of risk-off sentiment, had come off their peaks, the strategists added.

Driving the drop in the indicator over the past week had been redemptions in high-yield/Emerging Market bonds and in developed market equities.

One 'tell' to watch in order to confirm the "peak yield" story was whether the SPDR S&P Biotech ETF held the $65 mark.

The logic behind so-called 'contrarian' trades is that if at a certain price level and for a given backdrop everybody who wants to sell has already done so then only buyers are left.

Nonetheless, Hartnett and his team's recommendation was to "fade" a move in the S&P 500 towards 4,200 points, although they said they were "not in a rush to do so".

Also worth not losing sight of, on the longest time frames, in a separate research report published on 22 May, Hartnett and his team said that they were anticipating a 'regime change' towards higher inflation and a "great reset lower" in bonds, private equity and technology.


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Pilling and Co Stockbrokers Ltd. is not responsible for the content or accuracy of third party news articles and we may not share the views of the author or publisher.

We provide third party news for your convenience and information only and make no representation or endorsement whatsoever and hereby exclude all liability for any loss or damage that may be incurred by you as a result of your access or use. Please note that third party content may be subject to terms and conditions imposed by the third party owner of that content.

The value of investments can fall and you may get back less than you invested.