- Extreme times call for extreme moves, Bank of America said Friday, detailing the flow of investment funds in and out of key sectors of the market.
- Bank of America said U.S. stocks suffered their third largest cash outflow, with investors withdrawing $ 25.8 billion from the shares last week.
- Tech stocks, which have driven the market lower since the stock market hit record highs on September 2, suffered their biggest cash buyback since June 2019, according to Bank of America.
- September’s market correction is part of a “overshooting process,” but don’t expect a big bearish move as the Federal Reserve continues to implement easy monetary policies, the company said.
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Investors, worried about the increase in COVID-19 cases and the lack of additional fiscal stimulus from Congress, withdrew funds from U.S. stocks at the third fastest pace on record last week, said Bank of America said in a note on Friday.
Investors withdrew $ 25.8 billion from U.S. stocks, much of which, $ 11.6 billion, came from large-cap stocks, Bank of America said.
Tech stocks, which have led the market lower since their September 2 record, posted outflows of $ 1 billion, the fastest pace of outflows since June 2019, the company said.
The cash flow activity is part of a September ‘overshoot process’, but that doesn’t mean investors should expect a significant bearish move in equities, in part because the monetary policy of the Reserve Federal government remains easy, and in part because there is no irrational exuberance across Wall Street, Bank of America said.
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Bank of America’s Bull & Bear indicator has fallen in recent weeks to 3.8 from 3.9, well below the “greed” reading often associated with a heavy market.
Instead, Bank of America said, the market correction is “healthy rather than dangerous.”
Foam zones, like technology and the SPAC space, are being rolled out, which could lead the market to undergo “heavy” trading through October and through the end of the year, the company said. .
What comes down to assessing whether the stock market should be the subject of a bad sell are the credit markets. Until spreads widen significantly and corporate bond exchange-traded fund LQD maintains the price point of $ 130 to $ 132, Wall Street is “no bear business” in the fourth quarter, said Bank of America.
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On Friday, the LQD ETF traded 3% above the $ 130 level, which also coincides with its 200-day moving average. Traders will look to this level of support if the market does show prolonged signs of weakness.
Meanwhile, investors shouldn’t expect a march to hit record highs after this correction without another round of monetary and fiscal stimulus from the Fed and Congress, Bank of America said.
“With the biggest fiscal stimulus behind us and without an explicit MMT, it is difficult for politics to catalyze a strong rise in stocks and credit in the next 6 months given the starting valuations,” the note said.
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