• Extreme times call for extreme moves, Bank of America said on Friday as it detailed investment fund flows in and out of key market sectors.
  • US stocks suffered their third-largest ever outflow of funds, with investors pulling $25.8 billion out of equities in the past week, BofA said.
  • Technology stocks, which have led the market lower since the stock market hit record highs on September 2, suffered their biggest fund flow redemption since June of 2019, according to BofA.
  • The September stock market correction is part of a “topping process,” but don’t expect a big bearish move when the Fed continues to implement easy monetary policies, BofA said.
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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, according to a Friday note from Bank of America.

Investors pulled $25.8 billion out of US stocks, with a bulk of that coming from US large-cap stocks ($11.6 billion), BofA 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, BofA highlighted.

The fund flow activity is all 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 Fed remains easy, and partly because there’s no irrational exuberance across Wall Street, according to the note.

Read more: Sunil Thakor’s global stock fund has returned more than 500% to investors since 2009 by precisely targeting high-growth companies. He explains how he finds long-term winners in a ‘sweet spot’ that minimizes risk.

The BofA Bull/Bear indicator fell in recent weeks from 3.9 to 3.8, well below the “greed” reading often associated with a top heavy market. 

Instead, the current stock market correction is “healthy rather than dangerous,” BofA said.

Areas of froth like in tech and the SPAC space are being unwound, which could lead the market to experience “heavy” trading through October and into year-end, BofA highlighted.

What it ultimately 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 ETF LQD holds the $130 to $132 price level, Wall Street is “not a bear story” in the fourth quarter, BofA said.

Read more: Bruce Petersen spent 18 years in the retail industry before amassing a real estate portfolio with nearly 1000 units. Here’s the investing strategy he’s using that’s ‘head and shoulders better’ than a traditional approach.

The LQD ETF currently trades 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 start to show extended signs of weakness.

At the same time, investors shouldn’t expect a march to new record highs after this correction without an additional round of monetary and fiscal stimulus from the Fed and congress, respectively, BofA 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,” BofA explained. 

Read more: Northwestern Mutual’s chief strategist told us the 6 market drivers he’s watching most closely amid the volatility – and broke down where he’s putting his money over the next 9-12 months

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