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BoA: Cash Levels Show Market Sentiment Remains Subdued

Even though equity markets around the world continue to march higher, and show no signs of slowing down anytime soon, it seems investors would still instead invest in bonds.

According to the latest issue of Bank of America’s Flow Show Report, during the first week of January, investors withdrew $4.5 billion from equity funds ($3.9 billion ETFs and $0.7 billion mutual funds) and deposited $9.2 billion with bond funds. These flows are a stark reversal from the week before when investors banked $14.4 billion in equity funds and only $1.2 billion in bond funds.

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Last week's positive bond flow marks the 54th straight week that investment grade bond funds have reported inflows. It was the first week in ten that high-yield funds saw inflows with a total inflow for the week of $0.9 billion.

On the equity front, the most prominent flows by style were as follows US value ($0.5 billion ), US small cap ($2.1 billion), and US growth ($3.4 billion). Energy and Financials saw the most substantial outflows by dollar value of $0.7 billion each.

Cash Levels still not elevated

The lack of a risk-on trade among investors is enough to convince Bank of America's Global Investment Strategy team that, for the time being at least, the market shows almost no sign of "peak positioning" just yet. Indeed, BoA's Bull & Bear Indicator, which attempts to gauge market sentiment, currently stands at 6.2. When the indicator reaches 8 historically, this has been a good time to sell as market sentiment has become bubbly. Institutional cash levels display the same level of sentiment. According to BoA's analysis, cash levels are 4.7%, not the 3.5% of less required to indicate euphoria among institutional fund managers. BoA private client allocation to stocks is 60.8%, not >63%, which would once again indicate euphoric sentiment.

Throughout the first quarter, BoA's Global Equity Strategy team is expecting positive macro data to drive further index gains:

"US surveys consistent with >5% US real GDP growth in Q1/Q2 (Chart 3); Dec ISM consistent with >20% US EPS growth (Chart 4); yes very close to Peak Profits but spike in oil price likely first."

And for the time being, there are no visible macro risks on the horizon:

"Missing bearish Q1 inflation catalyst: wage inflation (e.g. US Avg Hourly Earnings >3%) needed to a. cause bond vol to surge/tighten financial conditions via higher global rate expectations & stronger US$"