Summer bear rally bandwagon on the move on 'peak inflation' talk, BoA says

Using their 'bear-bull' contrarian market indicator, which during the latest week had fallen from 1.5 to 0.6 on a scale of 1 to 10, they surmised that the "price was now right" given the broad-based declines in risk assets from their recent highs.

That was the indicator's second consecutive weekly move into "unambiguous contrarian buy territory" and it wasn't just a function of price declines.

It was about a possible peak in inflation and a Fed "pause" against a backdrop of a bevy of assets that were now oversold relative to their 200-day moving averages, the Bank of America team led by Michael Hartnett said in a research note sent to clients.

Were there any flies in the ointment? Yes, the "sneaky" new high in oil prices which tarnished the "peak inflation" narrative.

On the flip-side, levels of volatility in the US Treasury market, which had been the epicentre of risk-off sentiment, had come off their peaks, the strategists added.

Driving the drop in the indicator over the past week had been redemptions in high-yield/Emerging Market bonds and in developed market equities.

One 'tell' to watch in order to confirm the "peak yield" story was whether the SPDR S&P Biotech ETF held the $65 mark.

The logic behind so-called 'contrarian' trades is that if at a certain price level and for a given backdrop everybody who wants to sell has already done so then only buyers are left.

Nonetheless, Hartnett and his team's recommendation was to "fade" a move in the S&P 500 towards 4,200 points, although they said they were "not in a rush to do so".

Also worth not losing sight of, on the longest time frames, in a separate research report published on 22 May, Hartnett and his team said that they were anticipating a 'regime change' towards higher inflation and a "great reset lower" in bonds, private equity and technology.