Investors, skittish about rising COVID-19 cases and a lack of additional fiscal stimulus from Congress, pulled funds out of US stocks at the third-fastest pace ever over the past week, Bank of America said in a Friday note.
Investors pulled $25.8 billion out of US stocks, with much of that, $11.6 billion, coming from large-cap stocks, Bank of America said.
Technology stocks, which have led the market lower since their September 2 record high, saw $1 billion in outflows, representing the fastest pace of outflows since June 2019, the firm said.
The fund-flow activity is part of a September “topping process,” but that doesn’t mean investors should expect a big bear move in stocks, partly because monetary policy from the Federal Reserve remains easy, and partly because there’s no irrational exuberance across Wall Street, Bank of America said.
Bank of America’s Bull & Bear Indicator fell in recent weeks to 3.8 from 3.9, well below the “greed” reading often associated with a top-heavy market.
Instead, Bank of America said, the stock-market correction is “healthy rather than dangerous.”
Areas of froth, like tech and the SPAC space, are being unwound, which could lead the market to experience “heavy” trading through October and into year-end, the firm said.
What it comes down to in terms of gauging whether the stock market is due for a nasty sell-off is the credit markets. As long as spreads don’t widen significantly and the corporate-bond exchange-traded fund LQD holds the $130-to-$132 price level, Wall Street is “not a bear story” in the fourth quarter, Bank of America said.
The LQD ETF on Friday traded 3% above the $130 level, which also coincides with its 200-day moving average. Traders will look to that level for support if the market does indeed show extended signs of weakness.
Meanwhile, investors shouldn’t expect a march to record highs after this correction without an additional round of monetary and fiscal stimulus from the Fed and Congress, Bank of America said.
“With the biggest fiscal stimulus behind us and without explicit MMT hard for policy to catalyze big upside for stocks and credit next 6 months given starting valuations,” the note said.
