Sell stocks into strength on any COVID-19 vaccine news as 2021 turns into a bear market, BofA says

Lucas Jackson/Reuters

• Peak positioning, peak policy, and peak profits are three reasons why investors should sell their stocks into strength on any COVID-19 news in the coming months, Bank of America said on Friday.
• The bank likened today's scenario to 2018, when US tax cuts caused a temporary peak in investor positioning, fiscal policy, and corporate profits in the first half of that year.
• "We are sellers-into-strength into vaccine [rollout] in coming months," it said.
• Despite the negative outlook, BofA does see opportunity in the cyclical trade tied to the reopening of the economy, according to the note.
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Developments tied to the distribution and administration of COVID-19 vaccines will likely be viewed as a "sell the news" event that investors should take advantage of, Bank of America said in a note on Friday.

The bank foresees a similar scenario to 2018 playing out, as investors rush to buy stocks on positive news related to vaccines and the highly anticipated reopening of the economy. But that rush to buy stocks could represent a period of peak investor positioning, peak fiscal policy, and peak corporate profits, according to BofA.

In early 2018, shortly after the passage of President Trump's tax cuts, stocks meandered sideways for the better half of a year as investors struggled to identify a catalyst to push stocks even higher. This coincided with record stock inflows.

Read more: GOLDMAN SACHS: Buy these 20 deeply underpriced stocks now before the recovery helps them rebound and crush Wall Street's low expectations in 2021

Now, in the second week of November a lone, a record $44.5 billion flowed into equities, easily surpassing the previous March 2018 record, according to BofA data. 

Meanwhile, another round of fiscal stimulus would likely be the last for COVID-19 relief given the high likelihood of a divided government in 2021, pointing to peak policy and peak profits as companies benefit from a stimulated consumer.

2021 will be the year of the vaccine, and the reopening and recovery of the economy, which ultimately will lead to "bearish Wall Street," BofA said. And if the market does keep rising, it's "silly to think big stock market gains from here won't provoke negative political (higher taxes), economic (higher inflation), and financial (higher yields) response," BofA said.

Read more: A Wall Street expert says the dramatic shift in stocks last week reeks of investor complacency — and warns that many favorite trades remain vulnerable to losses

But the good news for investors is that opportunities will persist despite a potentially weak market in 2021, according to the note.

Small cap stocks will outperform large cap stocks, and value stocks will out perform growth stocks, according to BofA. In other words, "buy the reopening," BofA said, adding that the bull story of 2021 is "simply a reopening rotation story."

Read more: Peter Lynch disciple William Danoff manages over $124 billion and has beaten the market for 30 years. He shares the 10 investment rules that ensured his success.

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