BAML: Stocks are going to 'melt up' 10%

Get ready for a big upswing in the market, according to Bank of America Merril Lynch.

Michael Hartnett, BAML’s chief investment strategist, thinks there will be a rapid rise in the stock market in the coming months.

“Our tactical view: after a January/February wobble, we believe stocks & commodities will have one last 10% melt-up in [the first half of the year],” wrote Hartnett. “Call it the Icarus trade. The current melt up, which started back in Feb 2016, will be followed by a meltdown later in 2017.”

Hartnett wrote that the indicators — bearish investor sentiment, bearish profits, and weak policy — that were hallmarks of the recent stock market rally have started to fade. He also predicted that the top will be put in under three conditions:

  • Investor euphoria as measured by positioning: “bullish Positioning (BB indicator = 8, cash = 4%, unambiguous long positions in stocks, Japan & banks)”
  • Analysts’ profit expectations get ahead of reality: “excessively bullish Profit expectations (global PMI’s >55, US wage growth >3%)”
  • The Fed starts hiking more: “and Policy hawkishness (Fed jacks up short end of yield curve, ECB tapers). ”

Hartnett said that none of these three indicators are around yet, as profit expectations remain low despite improving underlying trends, cash levels are still at 4.8%, and financial conditions are still incredibly loose even after the Fed’s most recent rate hike.

This also doesn’t mean there can’t be some troubles along the way, wrote the BAML strategist. From the note:

“Sure, you can get a wobble in the coming weeks. Investor are partial to the ‘buy the election, sell the inauguration’ argument. Fed anxiety could pick up between the two winter FOMC meetings: February 1 & March 15 especially given December surge in US wage growth. And Trump/Mexico/China headlines/tweets have the ability to rattle sentiment as the new President seeks to immediately boost his ratings via populist trade policies & legislation from (…Occupy Wall Street to Occupy Detroit or Occupy Silicon Valley).

Despite the small slips, Hartnett believes that the future of the market is still bright for the first half of the year.

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