Mark the date 7/11/2016 in your historical calendar. This was the day bears threw up their hands and capitulated, Bank of America Merrill Lynch notes in a July 14 report. But will it hold into the US presidential election?

BAML 7 15 asset flows

Brexit? What Brexit?

With the stock market breaching new highs, climbing after the Brexit scare turned out to be a short-term false c`oncern as has been aptly predicted, are we headed for a good old fashioned summer rally?

Consider for a moment the potential negativity in addition to the Brexit wall of fear. With negative interest rates a concern to many market structure analysts, the prospect of a Wall-building, TPP “trade” agreement dissenting Donald Trump presidency lurking and the latest terrorist attack in France hardly causing a pause in the stock market’s sprint higher, what message is being sent?

For Bank of America’s Michael Hartnett, Chief Investment Strategist, and Brian Leung, Investment Strategist, what it looks like is investors are climbing on the roller coaster when it was at a cycle point. Its just unclear if this is the top, bottom or mid-point of that cycle.

BAML 7 15 Bull Bear Indicator

Investors fear at all time record and flows into bullish assets trigger rally analysis

In a July 14 “Flow Show” report titled “Bear Capitulation,” the pair of economic analysts’ point to an equity investment buy signal given to them July 1. The indicator to which they refer tracks general market sentiment and it then noted the crowd was going one way – following the prevailing meme of fear.

Separately, for market structure analysts the “V” shaped recovery had been completed on a price level. On the surface the price action was similar to the last two market price adjustments in August-September 2015 and January-February 2016. But underneath the market certain momentum indicators and correlations between logical indicators and markets were not lining up in consistent fashion.

The BAML report didn’t wade into these depths, but rather looked at rank fear. The masses of investors had been scared, their “Bull & Bear Indicator” showed. When the general thought process indicator fell to an “extreme bearish” reading of 1.6 on July 1, that was the time to declare an independence day from the thundering herd of investors.

This investment signal wasn’t the first. Independent analysis shows the “Bull & Bear Indicator” to be slightly non-correlated to the CBOE VIX index, which led the fear parade lower. The VIX topped out on July 27 – as top market structure analysts were expecting a move closer into the 30 level on the Brexit surprise. The VIX sent the message that the Brexit fear was no more real in the short term than a scary movie, and it proceeded to move lower into the comfortable 15 region by the time the BAML fear gauge indicated a buy.

BAML 7 15 HY flows

The equity and high yield flow show

But it is not just the fear index to which BAML’s top market strategists point to as causation for a bear capitulation. Look at equity flows. The summer rally is upon us as $6.4 billion has flowed into equity ETFs. This is the largest flow since December 2015.

Never mind that that last equity flow occurred in a month in which the US Federal Reserve raised interest rates, which was then followed by yet another market crash. On a weekly basis the report notes the largest equity inflows in 9 months, $11 billion that have made a positive expression regarding their opinion on stock market value.

But perhaps what is most interesting in looking at that date, 7/11/2016. The lead in the BAML research piece noting “bear capitulation,” a positive sign for stocks, was the fact that high yield inflows reached an all-time record. The riskiest part of the corporate debt market had touched the $2.1 billion mark. The reach for yield was at a zenith and the bull market was in place. Terrorism, Donald Trump and “trade” uncertainty be dammed. This market is going higher, at least this week. Did the report presage more stock market happiness to come, or will reality at some point grab hold?