BofA Says Take Profit on ‘Bear Rally’ as Stock Outflows Resume

(Bloomberg) — Investors have resumed shunning global stocks in favor of bonds, according to Bank of America Corp. strategists, who say the time is right to step back from US equities after the strong rally in July.

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Global equity funds had outflows of $2.6 billion in the week through Aug. 3, according to a note from the bank, after last week seeing their first additions in six weeks. US stocks had redemptions of $1.1 billion, and while $4.1 billion left cash, global bonds had additions of about $12 billion, the most since November, BofA said, citing EPFR Global data.

Strategist Michael Hartnett, who has said the recent rebound in stocks was more a bear market rally than a sustained run higher, reiterated that investors should “fade” the S&P 500 Index from a level of 4,200 points — just 1.2% above its latest close. He maintains that the bottom for the benchmark is below 3,600, or 13% below current levels.

US stocks have struggled to maintain their momentum in August after rallying in July on the back of a better-than-feared earnings season and bets that the Federal Reserve will slow the pace of interest-rate hikes. The technology-heavy Nasdaq 100 is nearly 20% above its June low, but strategists have said stocks are likely to fall again until profit estimates see much stronger downgrades.

HSBC Bank Plc strategist Max Kettner, a staunch bear on US stocks this year, was the latest to warn about a sharp end to the rally when saying on Thursday that he’d changed his stance on equities to “maximum underweight”. JPMorgan’s Marko Kolanovic is now one of the few top strategists forecasting a rebound for US stocks in the second half.

Bank of America’s Hartnett said that while investor sentiment remains bearish, shorts have been covered. The strategist expects the S&P 500 to trade in a range of 3,800 to 4,200 until the next Federal Reserve decision on Sept. 21, he wrote in the note.

The bank’s European strategists, meanwhile, have cut their view on regional equities to negative, saying their macro projections point to 10% downside for stocks by the end of the year. European equity funds had outflows of $3 billion in the week, their 25th straight week of redemptions, the data on fund flows showed.

In terms of equity flows by style factors, US growth and small caps had inflows, while large caps had the biggest outflows. Among sectors, consumer and financials saw the biggest additions, while materials and real estate had outflows.