Bank of America (BAC) Is Telling Investors to Sell Oil Stocks as Crude Prices Soar. Here’s Why

You might think that now would be an opportune time to buy oil stocks as crude prices soar to their highest level in years. But not according to Bank of America BAC -2.69% ▼ .

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Michael Hartnett, Bank of America’s chief investment strategist, says investors should sell oil stocks if the price of crude surpasses $90 a barrel, a level it breached in early trading on March 6. The call might seem counterintuitive, but Hartnett lays out a persuasive argument.

In his weekly research note, Hartnett explains why he thinks there will be a de-escalation of the Iranian war: politics. With gasoline prices up 15% in the last week, Trump’s approval ratings on the economy at 40%, and the Midterm U.S. elections on the horizon, the White House will not want a prolonged war and even higher oil prices.

If the war is mercifully short and risk appetite troughs in March, as Hartnett and team expect, then the bid for what he refers to as the inflation boom beneficiaries should reassert itself. These feature the commodities complex, international stocks
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and emerging markets
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.

Hartnett warns, however, that without investors adopting bearish positioning and without central banking policy panic, then any recovery in markets might be hard work. Hartnett also reckons a resurgence in Trump’s approval ratings is necessary for meaningful improvement in risk assets.

There are other conditions highlighted that need to be in situ at this point for a stock market rally to develop.

It requires the oversold assets like software stocks
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, the Mag7
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, bitcoin and private credit to bottom and for the overbought, such as gold
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, metals, semiconductors
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, emerging markets and European equities to correct. This positioning realignment would facilitate a better starting point for a rally but for the light to flash green, then the current bidding up of oil and the dollar need to subside.

The warning is clear, though: Hartnett’s recommendations are dependent on the conflict being contained and short-lived. If Iran escalates and the war broadens out across the region forcing oil above $100, then an oil price shock is coming.

One aspect of the dollar index being driven back up toward 100 is it persuades Hartnett that rate cuts are less likely. In the last few weeks the U.S. Treasury yield curve has flattened and is starting to price out any Fed easing in the remainder of this year.

Hartnett also suggests that one other signal indicating to traders that the market has flushed out excess bull positioning would be a drop in the S&P 500
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index below 6,600.

One feature of markets at present that Hartnett does find encouraging is the signs that the capital expenditure associated with the development of AI architecture might have peaked, evidenced by Nvidia
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telling investors its putative $100 billion investment in OpenAI is “no longer on the cards.” Any deceleration in that exponential capex growth will afford credit markets relief and may alleviate some of the risks around a “credit event,” he said.

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