- Bank of America said on Friday that turbulent times demand extreme moves, as it detailed investment fund flows in and out of key market sectors.
- Bank of America said US stocks suffered from the third largest inflow of funds, as investors pulled out $ 25.8 billion in shares last week.
- Technology stocks, which have led the market lower since the stock market hit record highs on Sept.2, have suffered their biggest cash flow recovery since June 2019, according to Bank of America.
- The company said that the September stock market correction is part of the “summit process”, but does not expect a major downward move as the Fed continues to implement easy monetary policies.
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Investors, floundering about the spike in COVID-19 cases and the lack of additional fiscal stimulus from Congress, have withdrawn money from US stocks at the third-fastest pace on record over the past week, Bank of America said in a note on Friday.
Bank of America said that investors withdrew $ 25.8 billion from US stocks. Most of that, $ 11.6 billion, comes from large stocks.
The company said technology shares, which have led the market lower since the highest level on September 2, saw outflows of $ 1 billion, marking the fastest pace of outflows since June 2019.
Fund flow activity is part of the “process top” in September, but that does not mean that investors should expect a major move in stocks, partly because monetary policy from the Federal Reserve remains easy, and partly because there is no illogical glut on Wall Street Bank of America said.
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Bank of America’s Bull & Bear Index has declined in recent weeks to 3.8 from 3.9, which is well below the “greed” reading often associated with a heavy market.
Instead, Bank of America said the stock market correction is “healthy, not dangerous”.
The company said butter areas, such as technology and the SPAC space, are being phased out, which could lead the market into a “heavy” trading experience through October through the end of the year.
What it relates to in terms of measuring whether the stock market is due to a bad sell is the credit markets. As long as the spreads do not widen significantly and the LQD fund of publicly traded corporate bonds maintains a price level between $ 130 and $ 132, Wall Street is “not a bear story” in the fourth quarter, Bank of America said.
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The LQD ETF on Friday traded 3% above the $ 130 level, which also coincides with the 200-day moving average. Traders will be looking to this level for support if the market does indeed show signs of extended weakness.
Meanwhile, investors should not expect a rally to record levels after this correction without an additional round of monetary and fiscal stimulus from the Federal Reserve and Congress, Bank of America said.
“With the largest fiscal stimulus behind us and without the use of the clear MMT, it is difficult for the policy to stimulate the significant upside for equities and credit in the next six months given the initial valuations,” the note said.
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