“SELL”: Wall Street’s Most Accurate Analyst

When Bank of America’s Chief Investment Strategist turned bullish last month amid a plethora of dire sentiment readings, few paid close attention.

Then the markets rose by 20% off their lows.

So, what is Wall Street’s most accurate analyst saying now?

In a word: SELL.

The Bear Market Is Not Over

According to Hartnett, the horizon is not rosy.

After polling 284 fund managers as part of his Fund Manager Survey, Hartnett reported that sentiment remained heavily bearish – a contrarian indicator that the managers, who collectively oversee almost $900 billion in assets, are too negative. Indeed, this is confirmed by Bank of America’s famous Bull Bear Indicator which sits at an 0.0, in other words: as bearish as it gets.

Such extremes in sentiment suggest the bear market rally is not over. When fund managers are “end-of-the-world” bearish, it usually means selling has hit climax levels, and the tide turns when demand starts to outweigh supply, causing prices to rise.

But don’t mistake rising prices in the short-term for the end of the bear market rally.

Here’s how Hartnett is analyzing the market…

How Will Markets Move Next?

In the short-term, Hartnett sees a market melt-up continuing. He describes his base case as rates going up and profits going down, which means he’s still bearish, albeit not in the immediate short-term.

Fade SPX above 4328 is his recommendation.

Given he forecast both the stock and credit markets would rise from July based on excessively bearish market sentiment, it’s worth paying close attention to his views. His last prediction hit the bullseye. Will the markets follow his new projections?

It would be a brave investor who bought the rally after a 20% pop and the data suggests there’s good reason for caution:

What The Data Says

The data from the Fund Manager survey shows pessimism is justified.

• Global profit optimism is near record lows but moving slightly higher
• Equity allocation is no longer overweight equities – in fact it’s down 26%
• Recession over the next 12 months is the consensus view
• 88% of investors expect lower inflation over the next 12 months
• The most crowded trade is long US dollar
• The biggest tail risk is that inflation remains high
• The top reason the Fed would pivot is if inflation fell below 4%
• The #1 system risk event would be a collapse of Chinese real estate
• Growth stocks forecast to outperform value stocks over next 12 months

Coincidence or Just Luck

Perhaps ironically, or accurately, on August 16 the markets hit the 4328 level that Hartnett pinpointed as the level to fade, and then they quickly did a U-turn right on Q with his fade recommendation. Within 24 hours, markets fell by 1%.

So will Hartnett be right and September be the death knell of the last bear market rally?

History says he will be right. Indeed, looking at the seasonal data, Labor Day has historically marked the high point for markets. September is famously a bearish month on the calendar.

If you’re all chips in and worried about a broader, longer downturn, maybe taking some off the table isn’t the worst idea in the world.