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A new report from Bank of America perfectly captures the current market

·Senior Markets Editor
·4 min read

Last week, Yahoo Finance noted companies could "feel the economy weakening" despite economic data that suggested otherwise.

This week, investors indicated much of the same.

Bank of America Global Research's Michael Hartnett publishes a closely-tracked weekly report on client fund flows for the firm, which offers a real-time indication on where investors are putting their money to work.

The firm's latest report, published Friday, showed investors were buyers almost across the board last week, with $11.7 billion coming into bonds, $7.1 billion moving into stocks, and $4.3 billion coming out of cash holdings. Money also moved out of commodities last week.

With stocks on pace for their fourth-straight week of gains — which would match the longest win streak since November — it's little surprise to see money coming back into the market.

From mid-June lows, the Nasdaq (^IXIC) is now up more than 20% and the S&P 500 (^GSPC) has cut its year-to-date losses to 11% after the benchmark index lost 20% in the first half of the year, the most since 1970.

For U.S. tech stocks, BofA's clients have now been net buyers for 8 straight weeks, and last week some $2.5 billion moved into U.S. growth-focused funds, the largest inflow since December 2021, when buying the dip on all pullbacks was still en vogue.

Even with inflows suggesting a turn in investor sentiment, Bank of America's "Bull & Bear Indicator" — released in the same report — remains pinned at 0.0, suggesting investors literally could not be more bearish on stocks.

Which, according to BofA, means it's a great time to buy. And investors have followed suit.

Bank of America's latest
Bank of America's latest "Bull & Bear Indicator" could not be more bearish. (Source: Bank of America Global Research)

This indicator measures six main components, and three readings stand out — hedge fund positioning, long-only positioning, and market breadth.

Taking these in order, hedge fund positioning — or how much these investors are allocating to stocks versus their normal allocation — suggests the "smart money" isn't buying this rally. This indicator, in BofA's work, shows hedge funds' equity allocations are currently in the 14th-percentile relative to history.

Long-only positioning is the same story, only more bearish. These investors — which run funds that can only play one side of the market, which in this case is stocks going up — have allocations that are currently in the 2nd-percentile relative to history. In other words, long-only funds have almost never had less money at work.

And equity market breadth, which measures how many stocks are rising versus falling, remains thin, sitting in just the 5th-percentile relative to history.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 19, 2022.  REUTERS/Brendan McDermid
Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 19, 2022. REUTERS/Brendan McDermid

In a note to clients published Friday, Fundstrat's Tom Lee wrote that recent meetings with institutional investors have surfaced "deep skepticism" about this recent rally, which tracks with what Bank of America's latest survey shows.

Just as strong labor market data combined with downbeat commentary shows businesses talking one way and acting another, so too does BofA's flows data show investors hating this rally yet nevertheless starting to buy.

And when we compare what the third quarter has so far been to investors versus a year ago, we're reminded that investing is rarely comfortable and the story we tell ourselves often fails to line up with reality.

Between the meme stock rally, the economic re-opening, the crypto bubble, and "hot girl summer," there is little doubt investors were having more fun a year ago. This year, a war in Europe, 40-year highs in inflation, and Crypto Winter have taken the cultural pop out of investing.

Yet if we look at the S&P 500's actual returns in the third quarter of 2021, we'll find it was the year's worst quarter for the index — the S&P 500 gained just 0.2% during the quarter covering July, August, and September. So far in the third quarter this year, the S&P 500 is up nearly 12%.

Just as everyone predicted.

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