BofA Analyst Who Predicted Demise Of Armchair Vol. Sellers Has A 'Notoriously Good' Leading Indicator He Needs You To Look At

You'll either listen to Michael Hartnett, or you'll end up like Seth.
Publish date:

Let me ask you something: Did you bail on stocks in late January faster than John Dowd bailed on Donald Trump after Robert Mueller suggested he could subpoena the President?

If not, then you were still long risk (and maybe short vol. with Seth Golden) for February's bloodbath, catalyzed as it was by inflation jitters and exacerbated by the worst VIX spike in history.

Well do you know who you can't blame if you didn't sell during the last week of January and ahead of the mayhem? BofAML's Michael Hartnett, that's who. And the reason you can't blame him is because he tried to warn you, goddammit.

In fact, on January 26 he told folks that his proprietary "Bull & Bear Indicator" had just flashed a sell signal and in case you were prone to being skeptical of that indicator, he reminded you that if backtests are any guide, it's infallible. Here's the key excerpt from that late January note:

BofAML Bull & Bear indicator has given 11 sell signals since 2002; hit ratio = 11/11; average equity peak-to-trough drop following 3 months = 12%; note the last Bull & Bear indicator flashed was a buy signal of 0 on Feb 11th 2016.

And for the dullards out there who might not be especially goodly when it comes to reading wordzes, he provided you with the usual giant RPM gauge-style visual that was flashing bright-ass red:


That, just days after his Global Fund Manager Survey flagged "short vol." as the most crowded trade on the planet.

So yeah, that was all looking pretty prescient two weeks later, after global equities careened into correction territory and the short VIX ETPs blew up, leading the Seth Golden crowd to ponder the depressing prospect of going back to a life spent making the cigarette break schedules at the local Target (people get mad at me for joking about that, and to be clear: I most assuredly do not care).

Subsequently, Hartnett would warn that "long FAANG" had replaced "short vol." as the most crowded trade on Earth (primarily because the short VIX ETP massacre cleared the deck). That too proved prescient as tech would promptly stumble on regulatory concerns ("just sell the damn robots!").

Is Hartnett therefore like Punxsutawney Phil, a "Seer of Seers, Sage of Sages, and Prognosticator of Prognosticators"?

Well, no. Or at least probably not. Because if he was, you'd think he would have just built an algo based on his indicators and surveys, hit "go" and disappeared into the Swiss Alps.

But given his recent track record, it's probably worth paying attention to the things he says and in his latest note, he shows you the following chart which suggests that if you want to know about trends in global profits, all you have to do is ask Seoul how exports are doing:


That red arrow is there to show you what it looks like when a line that was previously rising peaks and starts to fall. Here's Hartnett:

South Korean export growth, a notoriously good global cyclical indicator, turned negative for 1st time since 2016. And Global Quant Strategist Nigel Tupper’s Global Earnings Revisions Ratio fell below 1.00 for 1st time since Feb’17.

Well, since you brought Nigel into it.

Humor aside, Hartnett makes a good point there. Or rather, he delivers a poignant visual that goes a good ways towards driving home the notion that the narrative has recently shifted from a story about "synchronous global growth" to a a U.S.-centric story about the extent to which Trump's late-cycle fiscal stimulus may succeed in prolonging what is already the second-longest expansion in U.S. history while the rest of the world decelerates.

It truly is "America first" or, as Barclays recently put it, the U.S. is "the last man standing." That hints at increasing policy divergence between the Fed and other DM central banks which in turn tips a stronger dollar and everything that comes with a dollar liquidity crunch.

But look, don't go jumping off any bridges, ok? Or at least not on account of BofAML. Because Hartnett is only "tilting" bearish, which certainly reads like a step down from his tone at the end of 2017.

Oh, and as for that "perfect" indicator mentioned here at the outset, it's back to "neutral territory" which, Hartnett reminds you, is "good news [and] indicates investors [are] no longer as directionally euphoric on credit & equity markets as they were [in] late-January."