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Bank of America warns a market pullback in Q1 is now 'very likely'

Dion Rabouin · Anchor

The record pace of money flowing into equity markets has triggered a strong sell signal for analysts at Bank of America-Merrill Lynch (BA) (BAML).

In a report titled “Non-Stop Euphoric Cabaret,” BAML analysts say their selloff indicator shows stocks are very likely in for a fall in February or March. They noted that the historical average peak-to-trough drop in the S&P 500 (^GSPC) was 12%.

Charging Bull Wall Street
The idea of the bull market dying because of central banks tightening too quickly is a concern, according to some experts. (AP Photo/Mary Altaffer)

The metric, known as the Bull & Bear Indicator, rose to 7.9, its highest level since March 2013. In contrast, the measure showed a reading of 0 in February 2016.

The culprit may be the slew of cash sloshing into global equities. BAML observed an all-time high $33.2 billion inflow to equity funds this week; a record $12.2 billion inflow to active funds; $1.5 billion into gold, a 50-week high; and record inflows to tech and Treasury Inflation Protected Securities.

This chart shows the rotation globally out of bonds and into equity positions, specifically high-yield bonds. Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global
This chart shows the rotation globally out of bonds and into equity positions, specifically high-yield bonds. Source: BofA Merrill Lynch Global Investment Strategy, EPFR Global

They also noted its measure of “private client equity exposure rising at fastest pace in 10 years … cash allocation at record low (10%); 98% of global equity markets trading above 50 & 200 day moving averages,” in the report.

These warnings come as some fund managers who say that now may be a time to hold some cash.

A similar note from Jefferies also found record levels of cash moving into equity funds this week with emerging markets and European equity funds seeing all-time high inflows. During the week ended Jan. 24, the size of inflows hit a record high in dollar terms and was the largest in percentage terms since November 2016.

Jefferies also noted the increasing allocations into riskier assets like emerging markets equities and out of global bonds.

“At the regional and sector levels, last week’s addition was one of the best in history,” analysts said in a note to clients. “The $8.0 billion (0.6% of AUM) and $8.2 billion net injections in EM and European equities was a record high in dollar terms. Furthermore, the $11 billion and $1.1 billion equity purchase in Asia and EMEA stood at a two-and-a-half-year and five-year high respectively.”

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Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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