Chart 9: In May, the Nasdaq recorded its longest streak of monthly gains since 2009 (7M). However, compared to the only other instances of longer streaks (‘86, ‘95) the current bull run is still only half the size
Chart 10: Tech valuations seem to be gaining momentum and are now at their highest levels since before the GFC but remain far from dotcom bubble peaks
60 50 40 30 20 10 00 90 80
= 100 as of 30-Sep-85
May-86 Bull Run === Oct-95 Bull Run
May-17 Bull Run
Source: BofA Merrill Lynch Global Research. Data from Sep-85 to 31-May-17
60 50 40 30 20 10
or Ow OO st © conwmnonDm @D Dm ODD D DD DMD MD
98 2000 2001 2003 2005
-Koonwtw eogor rcs NN NN NN
== SPX Tech P/E (price to consensus forward 12m earnings expectations)
Current
Source: BofA Merrill Lynch Global Research. Monthly data from Jan-86 to May-17.
In addition to strong price performance, lofty valuations, and exuberant inflows, asset bubbles also tend to have two other hallmarks, best seen through the derivatives lens: (i) asset volatility rising alongside asset prices (Charts 11 & 12), and (ii) declining
correlation as assets closest to the source of the bubble decouple from those farther
removed (Chart 11).
Chart 11: During the 2000s Tech Bubble, Tech vol rose with Tech stocks and broader market correlations fell as Tech stocks decoupled from other large caps — both classic signs of an asset bubble
Chart 12: Historically, in major asset bubbles, realized volatility has tended to rise meaningfully not only after the bubble deflates, but also in the run-up to the market peak
70% 5000 fe} «n 4000 0 ‘a 40% AS 3000 30% 2000 on > ~s “0% 1000 0% 0
‘95 '96 ‘97 '98 '99 ‘00 ‘01 ‘02 ‘03 ‘04 === NDX 1Y realized vol =——=SPX 1Y realized correl NDX (right)
Source: BofA Merrill Lynch Global Research. Daily data from 3-Jan-95 through 31-Dec-03. SPX correlation = average pairwise realized correlation of all 500 stocks.
75% ; Asset bubbles (peak): 2 * Dow Jones (Sep-29) 1 = 65% + + Gold (Jan-80) S 55% 4 * Nikkei (Jan-90) Ls * Nasdaq 100 (Mar-00) Si 45% | * HSCEI (Oct-07) 2 * Crude oil (Jul-08) s 35% - * Biotech (Jun-15) 2 25% 15%
NotoonoayotOeNoodt iN) — 1 TT NN
NostOoeo LOS STO OON
~~ [i i i ee ee OO a es a
Weeks from peak
Source: BofA Merrill Lynch Global Research.
While Nasdaq 100 (NDX) implied volatility has spiked in recent weeks and now trades in the 94" percentile as a spread to S&P 500 (SPX) implied volatility (Chart 14), the absolute level of NDX 3M implied vol remains historically low (2"¢ percentile since Jun- 09). In our view, at least for now, the spread widening is more of a response to the
outsized sell-off seen in Tech stocks on 17-May rather than the volatility market trying to price in the onset of another Tech Bubble. Indeed, the -2.5% drop in the NDX on 17- May was a six standard deviation (60) event relative to trailing realized volatility (and the fourth worst risk-adjusted daily return since 1985), even more extreme than the 50 decline experienced by the S&P.
Bankof America
Merrill Lynch Global Equity Volatility Insights | 06 June 2017 5
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