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Here’s Wall Street’s next biggest pain trade: BofA

Yahoo Finance’s Jared Blikre, Myles Udland and Brian Sozzi discuss latest moves in the market and the latest Bank of America survey of global fund managers.

Video Transcript

MYLES UDLAND: All right, we see the opening bell here on the floor of the New York Stock Exchange. Sirius Point ringing the opening bell. Not a SPAC. They're in the insurance business, Sirius Point, formed from the merger of Third Point Reinsurance and Sirius Group. And we see there the bell. As we get today's session underway, we'll see where opening indications come in.

Again, pretty surprising 3% decline in retail sales in February, crossing the tape about an hour ago. We had futures pointing to a mixed open as the Dow and the S&P came off record closes during yesterday's trading session. It looks like we're getting first trades here, and the Dow in the red right now. S&P looks higher. NASDAQ-- no indication as of yet.

Let's bring in Jared Blikre now for a conversation about the markets. And Jared, let's start with something that you just flagged to us in our Slack, and I know myself and Brian were looking at this morning as well. That's Bank of America's latest Global Fund Managers Survey. Some really interesting numbers in there. But really, the headline, I think, that grabbed everyone is respondents to that survey are no longer most worried about COVID. They're now most worried about inflation. And BFA's headline was, it's over. And I got to say, in markets, it's kind of felt like that for some time now.

- Yeah, it did. And I have some of the details ready and cued here. I just want to go over the opening stats for the market first. We do have record highs in the Russell 2000 on the open, and also the S&P 500 here. But we're not seeing a lot of movement except in the NASDAQ. And we'll just take a quick two-day look there. You can see up 1.5%. That is the leader today.

But back to that Bank of America Global Fund Manager Survey. It matters because the respondents manage about 2/3 of $1 trillion. This is the hedge fund and portfolio community. Here is the 10-year T-note yield. And this is a big feature of the report. So I just want to point out that we are still close to these 13-month highs.

Also want to point out that the VIX-- VIX is below 20. Now, the last few times it has done this, guess what? It has gone up again at this precise level. So we do have that FOMC meeting tomorrow. Could see some FOMC drift into it. But this could be a bottom in the VIX, potential top in the market.

And I just want to get now to that Global Fund manager survey. Here are a couple of points. Now, the bottom line-- investor sentiment is unambiguously bullish. COVID no longer the number one tail risk, as you just mentioned, Miles. And this is the first time since last year. So inflation, taper tantrums now the biggest risk. And we've seen this huge move into cyclicals. So basically, capitulation into cyclicals is what they're talking about, the biggest drop in tech exposure in 15 years.

And one of the contrarian indicators hasn't flashed a sell signal yet. But I think it's instructive that they asked the respondents some key questions here, and here's one of those questions. What 10-year Treasury yield causes a greater than 10% equity correction? And that number is 2.0. So that's about 40, 50 basis points above where we are now right now.

And then what yield on a 10-year Treasury makes bonds attractive relative to stocks? And that's 2.5%. So we've seen this huge selloff in bonds. But as that happened, yields go higher, and they draw in new investors. And then finally, as to the crowded trades, I think this is pretty interesting. Long tech still deemed most crowded trade, but nevertheless, we've seen this huge allocation. Allocators cut tech to lowest overweight since January of '09, so there may be a misperception on the Street about whether or not long tech is still crowded trade, because flows are saying that it's not.

And so also noting that huge overweight flows in the banks, energy. And if we are going to go to 2%, here are the contrarian trades-- long cash, short commodities, huge overweight in commodities right now, long utilities, short industrials, and then long tech, short banks. So some of the trades that have worked the best this year, the value and cyclical trades, could get a major hurt put on them, at least in terms of portfolio managers, should the 10-year yield rise further. And that's a little bit counterintuitive, but also depends on the speed of the move. Because we saw when bond yields move up quickly, that causes some consternation for equities.

So I think the major pain trade here is potentially unraveling, even if it's only temporary, of that value in cyclical trade. That would put tech back in favor if only for maybe a few weeks. We'll have to see how that plays out, guys.

BRIAN SOZZI: Jared, staying on tech, what are you seeing in FANG stocks? Yesterday they caught a bid. The market was OK, but they caught a bid. And that has been a rarity over the past few weeks. Yeah. We've seen a slow rotation-- and it's been ever so slight-- into these tech names that had those huge selloffs. Worth pulling up another Apple chart. This is year to date. We were showing this yesterday.

Apple is now just beginning to break out of this negative trend line. I said that was something that we needed to see. So we might come down and retest the breakout level or even these lows, which are about $117, $115. But nevertheless, things are starting to look constructive for the mega caps. And this ties into what I was just saying-- that we could see a move back into this unfavored tech sector. And the mega caps-- if they're leading and they're going higher, even if the value in cyclical trades fall off a bit or go into the red, the market, the S&P 500, can still move higher because of the overweight nature of these mega caps.

And you get a sector like software or semiconductors. Semiconductors have been doing well lately. That could also see huge inflows as interest rates head higher, which I think would be nonintuitive for a lot of people.

MYLES UDLAND: Just another move to call out here-- the real VIX, also known as GameStop-- that stock is down about 6% now here at the open. But seriously, Jared, Gamestop's vol has been a weird inverse proxy for the overall market. And so seeing some of that juice come out of this name today, again, a sign maybe things are right-sizing.

Even just looking at this broader screen, this heat map you're pulling up, meme stocks in general not doing a lot. Again, I think that's probably broadly constructive for the market setup so we can get back to thinking about real stuff instead of where Reddit is going to squeeze some-- and that stuff's fun. That stuff is great. But that stuff is not really impacting where the real economy is at. All right, Jared Blikre, always fun.

JARED BLIKRE: You're saying don't buy Reddit.

MYLES UDLAND: We'll check in with you-- that's right. We'll check in with you during tomorrow's program.

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