The ultimate market lows have not been reached, Bank of America’s Hartnett says

Published Fri, May 13 202210:43 AM EDTUpdated Fri, May 13 20221:00 PM EDT

The search for a tradeable market bottom will continue for a while longer until more conditions are met, according to Bank of America. As the S & P 500 and Dow Jones Industrial Average edge closer to a full-fledged bear market, Wall Street has been on the lookout for signs of capitulation — that moment when a large swath of investors finally give up and, in so doing, create a buying opportunity. The good news is that some of those conditions have been met. The bad news is, not enough. "Are We There Yet? No," Michael Hartnett, Bank of America's chief investment strategist, wrote in his weekly "Flow Show" report that analyzes where investor cash is moving. "[F]ear & loathing suggest stocks prone to imminent bear market rally, but we do not think ultimate lows have been reached, nor ultimate highs in yields." The Dow is off nearly 14% from its January peak, while the S & P 500 has slumped about 18%, based on Thursday's close. The tech-focused Nasdaq already is in a bear market, having lost nearly 30% from its late-2021 high. Going down Hartnett's "capitulation checklist" shows that three of nine triggers have been hit, but the rest remain elusive. Institutional investors' cash levels rising to 5.5% amid plunging expectations for growth and profits point to a bottom. However, results from April's fund manager survey show investors are still a distance away from throwing in the towel. For example, continuing expectations for higher interest rates are counter to what usually happens at market lows. Also, equity allocations are still positive and investors remain heavily underweight in safe haven bonds. "Lows require investors to close their underweight bond allocation," Hartnett said. Private client equity allocations at 63% remain high compared to other bottoms, and fund redemptions remain low, at just $4 for every $100 of inflows. One final point that indicates a capitulation could be coming, though, is "investors selling what they love," Hartnett said. The prime example: Apple , which is down about 22% from its peak and in an official bear market. Hartnett said "the big one to hold" is the 100-day moving average of $137 for the stock. Apple closed Thursday at $142.56.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 12, 2022.

Brendan Mcdermid | Reuters

The search for a tradeable market bottom will continue for a while longer until more conditions are met, according to Bank of America.