- Extreme times call for extreme moves, Bank of America said Friday as it detailed the flows of investment funds in and out of key market sectors.
- US equities suffered the third largest outflow of funds ever, with investors withdrawing $ 25.8 billion from the shares last week, BofA said.
- According to BofA, tech stocks, which have led the market to the downside since the stock market hit record highs on Sept. 2, suffered the biggest redemption of the flow of funds since June 201
- The September stock market correction is part of a “peak process,” but don’t expect a major bearish move as the Fed continues to implement easy monetary policies, BofA said.
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According to a Friday note from Bank of America, investors, worried about the rise in COVID-19 cases and the lack of further fiscal stimulus from Congress, have withdrawn funds from US equities at the third fastest pace ever recorded in the United States. ‘last week.
Investors took $ 25.8 billion from US equities, with the majority coming from large-cap US equities ($ 11.6 billion), BofA said.
Tech stocks, which led the market lower from their record high on September 2, saw $ 1 billion outflows, representing the fastest pace of outflows since June 2019, BofA noted.
Fund flow activity is all part of a September “topping process,” but that doesn’t mean investors should expect a major bearish move in equities. Partly because the Fed’s monetary policy remains easy and partly because there is no irrational exuberance on Wall Street, according to the note.
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The BofA Bull / Bear indicator has fallen from 3.9 to 3.8 in recent weeks, well below the “greed” reading often associated with a heavy upper market.
Instead, the current stock market correction is “healthy rather than dangerous,” BofA said.
Areas of foam such as technology and SPAC space are being phased out, which could lead the market to experience “heavy” trading through October and through the end of the year, BofA pointed out.
What ultimately comes down to whether the stock market is due to a bad sell-off are the credit markets. As long as spreads don’t widen significantly and the LQD corporate bond ETF holds the $ 130 to $ 132 price level, Wall Street “isn’t a bearish story” in the fourth quarter, BofA said.
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The LQD ETF is currently trading 3% above the $ 130 level, which also coincides with its 200-day moving average. Traders will look for support at that level if the market really begins to show extensive signs of weakness.
At the same time, investors shouldn’t expect a march to new all-time highs after this correction without an additional round of monetary and fiscal stimulus from the Fed and Congress, respectively, BofA said.
“With the biggest fiscal stimulus behind us and without an explicit MMT difficult for policy to catalyze a big rally in equities and credit over the next 6 months given initial valuations,” BofA explained.
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