In the past two months we have written extensively on how most market participants got caught offside by the dramatic reversion in risk assets, and which after several attempts at bottom-fishing - attempts which have failed because as Morgan Stanley first noted two months ago the Buy The Dip trade no longer works.

Increasingly more traders have thrown in the towel, resulting in YTD returns which are truly "historic" with not one single asset generating positive returns for the first time since the Nixon presidency.

Well, that's not exactly right: one asset is outperforming - the one which usually does best just as the economy slides into a recession or worse: cash. As Bank of America notes,the YTD score for the top global assets is the following:

• equities -4.2%,
• bonds -2.3%,
• commodities -6.2%,
• cash 1.7%,
• US$ 4.9%.

Drilling down reveals an even uglier picture: the 2018 bear market has spared nobody with US Treasuries down -4.9%, the fifth largest loss since 1970, US IG bonds -3.3%, their fourth largest loss since 1970, meanwhile 1881 of 2767 global stocks are in a bear market, down more than 20%, 86 of 94 equity indices underwater, and the cherry on top - the FAANG bull market "leader" is down -26% from highs, which according to BofA's Michael Hartnett is "a big nasty bear market."

The result, per Bank of America, is that "capitulation to lower credit & equity allocations begins but from high allocations to risk assets."

That's the good news: the bad news is that even as investors are bailing out of risk assets, they are also dumping safe havens like treasuries, and in the last week we saw broad based risk-off flows, including a $5.2 billion outflow from equities, and an $8.1B billion outflow from bonds this week. Looking at the latest EPFR fund flow data, Hartnett observes 3 flows trends:

• value to growth...inflows to tech (largest in 11 weeks) & healthcare, big outflows from financials;

• Europe to EM...inflows $17bn to EM past 8 weeks, outflows of $17bn from Europe stocks;
• Corp bonds to govt bonds...inflows $15bn last 8 weeks to govt bond funds, $49bn outflows from IG, HY, EM debt.

Yet while "capitulation" is now in full force, the BofA CIO makes another interesting observation, namely that "Everyone is bearish but no-one is short!"

This can be observed in the inability of oversold markets to react positively to the "Trump blink" while last week's "Fed blink" indicates capitulation to lower credit & equity allocations has begun. Yet the starting point for capitulation to lower risk allocations is high 67% equity allocation at world's largest SWF, high 60% equity allocation at BofAML, <5% cash levels at long-only in BofAML FMS, still high 35-40% net long at HFs.

In other words, there is a long way to go, and the next leg of the bear market will emerge when the 2s10s US yield curve becomes fully inverted. As Hartnett sarcastically points out, an inversion is not normally associated with GDP & EPS upgrades; in fact quite the opposite - curve inversion preceded 7 out of 7 past US recessions;

Finally, with the yield curve about to inverted, Hartnett warns that the 2019 global EPS forecast of 8.3% is far too high (someone please inform JPM's Marko Kolanovic), and while markets are starting to price in recession, policy makers have yet to price in recession.

Which brings us to what Hartnett sees as the "big risk, namely that while the Fed is "strongly hinting" it's "one and done" the market is also "strongly hinting" this is not enough to increase risk appetite when EPS falling, spreads widening.

As a result, Hartnett doubles down on what he suggested first two weeks ago, namely that the "Big Low" in markets will hit in early 2019, and will occur as a result of bearish Positioning, Profits, and Policy Panic driven by credit & equity flush in coming months.

Only then, when the Fed capitulates and not only stop hiking but hints at cutting and QE4, will it be time to start buying.