How Hartnett Is Trading The Coming Geopolitical Shock: "Trade Oil, Own Gold"

It was two years ago when we first pointed out that long AI bubble/short energy is one giant pair trade. 

Long AI Bubble/Short Energy pair trade has engaged

— zerohedge (@zerohedge) August 14, 2024

Fast forward to today when finally the street has figured out just how massive this "growth/value" pair trade was all along, and as Michael Hartnett writes in his latest Flow Show, there has been a dramatic reversal in market leaders/laggards over the past 2 years.

According to the BofA strategist, stocks traded AI leaders only in '24/'25, and in '26 markets have reversed AI leaders and laggards, to wit: 

• long "builders" (semis/materials) & short "spenders" (Mag7),
• long "adopters" (banks) & short "disrupted" (software);

Yet once the market cap of laggards exceeds market cap of leaders, then it becomes a problem for the S&P. 

And this is where our favorite pair trade comes in play, because as Hartnett writes, the contrarian "long staples-long energy" barbell has certainly bested the consensus "long tech-long banks" barbell YTD. Yet as noted above, watch the selling because tech, telcos, financials = 56% of SPX, so the key 200dma levels for financials (XLF $53), tech (XLK $135), telcos (XLC $111) must hold to prevent a flush in the S&P as it becomes top heavy from the selling of winners and topples over. 

And speaking of oil, Hartnett writes in his "Price is Right" section that oil is the best performing asset in 2026 on US Iran, and geopolitical shocks. 

Just don't overstay your welcome: as the next table shows, following geopolitical shocks in past 90 years oil is the best performer over 3 months (up 18%), then gold (6%) US stocks (4%); but 6 months after geopolitical shocks gold keeps outperforming (up 19%), stocks stall, while oil reverses all gains. Or as Hartnett puts it "Rock the Geopolitics = trade oil, own gold."

Taking a step back from the looming geopolitical shock, and turning toward the broader market, Hartnett references the latest Fund Managers' Survey (which we discussed earlier this week), and notes that while positioning (extreme bull) & profits (consensus = boom) both say “sell” stocks & credit, policy (tax & rate cuts) says “buy any dip”... so confusion prevails.

To get the market out of its current funk, Hartnett thinks that two exogenous shocks are needed "to boost risk assets from current lofty level"

• 1) regime change in Middle East to secure abundant future oil supply and collapse oil price 

• 2). Trump China trade deal in April to reduce tariffs and improve Trump approval rating (new low 42%) driven by affordability frustration (inflation approval 35%)

Taking a quick look at the latest weekly fund flows, Hartnett highlights $35.2bn to stocks, $26.4bn to bonds, $23.8bn to cash, $1.4 from gold (largest outflow in 4 months), and $0.8bn from crypto. Flows are the main flows to know: 

• TIPS: largest 3-week inflow since Mar’22 ($2.2bn);
• International equities: record 4-week inflow ($64.6bn), mostly Korea (memory stonks) and Japan (reflation narrative);

• Korea equities: largest 6-week inflow ever ($17.7bn);
• Financials: largest 2-week outflow in 9 weeks ($0.8bn).

Looking at the Big Flow to Know, Hartnett calculates that in 2026, for every $100 of inflows to global equity funds, US stocks have accounted for $26, their lowest share since 2020...

... the US share peaked in 2022 at $92, was $73 in 2024 and fell to $45 in 2025; According to the BofA strategist, "US exceptionalism theme ending with lower relative inflows to US assets, not outflows from US assets."

Finally, extending on the latest Fund Manager Survey finding of extreme positioning and profits, Hartnett writes that the BofA Bull and Bear indicator dips a fraction, from the record 9.5 to 9.4; That said, the Bull & Bear Indicator still reads “extreme bull”, and is near the highest since Jan'18 on sustained inflows to global stock ETFs & tech funds, strong global stock index breadth (75% of ACWI markets trading >50 & 200dma), bullish BofA Global FMS positioning (e.g., cash levels 3.4%) partially offset by outflows from EM debt, hedge funds turning net long VIX futures; Bull & Bear Indicator moved to >9.5 on Feb 3rd, only 3 times past 25 years (Jan'04, Mar'06, Jan'18). All of those episodes were followed by notable market shows...

... where the median "max drawdown" in the following 3 months was ACWI -4.3%, S&P500 -5.5%, Nasdaq -8.6%. 

 More in the full BofA Flow Show note available to pro subs.