FAST FIVE: BofA: Here Is The Sequence Of Events That Will Lead To The Next Crash
So while technicals will surely be a major hurdle to overcome, there is a case that sends the S&P back to its all time highs around 2,950. According to BofA chief investment strategist Michael Hartnett, while catalysts for the S&P move from 2350 to 2750 were bearish positioning and panicking policy makers, the catalysts for fresh upside to new highs would be “green shoots” & “greed” even as few see EPS acceleration, while most think the Fed is “pushing-on-a-string.” To make it easier for the bulls, Hartnett then lays out an indicative “green shoots” checklist for EPS emerging from the upcoming earnings recession, would include the following items: US 2s10s yield curve steepens to 50bps from 16bps, Asia export growth up 7% YoY from -2%, global PMI up above 53.0 from 50.7 (Feb survey data poor), China financial conditions index (CHBGMCI) up to 95 from 84, which as we noted previously is already taking place thanks to a gargantuan credit impulse/injection which saw China's Total Social Financing explode in January to the tune of over 5% of GDP.
In addition to the checklist, there are specific lead indicators which will suggest if the dreary macro picture is improving, and these include the Korean KOSPI stock index, Asia FX via the ADXY, strength in semiconductors (SOX) and homebuilders (XHB), and continued rise in oil, all of which currently are trending in the right direction for bulls; In fact, the only major risk-on signal missing right now is a weaker dollar, as DXY lower would show higher dollar liquidity is easing global financial conditions.
So assuming all of this happens, and the market rally is finally justified by improving fundamentals, what then.
Well, as often happens with market, that will be the bearish case, one that result in higher commodity prices and rising inflation, prompting the Fed to resume hiking once again.
Finally, as he always does, Hartnett concludes with two trade ideas – the first one is the rational, or consensus trade, and the second the contrarian, irrational trade: Today's rational trade is consensus trade: “sell-into-strength”, own corporate bonds, EM assets, US stocks, growth stocks, defensive stocks with yield.