Market Preview: So Much for a Slow Tape

Bank of America Merrill Lynch is positive looking out over the next 12 months, but the firm's research investment committee outlined a "bad goldilocks" scenario for the second quarter on Tuesday that suggests investors should be wary in the near term.

"The 2Q backdrop is neither 'cold' enough to provoke the fresh bout of quantitative easing that many risk assets so cravenly desire, nor 'hot' enough to provoke losses in fixed income markets and inspire a rotation out of bonds and into equities and commodities," B of A said, adding later: "The good news for markets for 2Q is that investors are bearishly positioned, which limits the downside to asset prices."

The firm estimates that, over the past 12 months, investors have put $150 billion to work in fixed income funds, while withdrawing $140 billion from long-only equity funds.

"Both private and institutional clients remain very cautious," B of A explained. "Flows indicate that investors have strong appetite for taking some risks in fixed income via investment grade, high yield and EM emerging markets debt. But there is little appetite for equities."

The firm has some fairly ambitious targets for year-end 2012, projecting that gold rises to $2000 an ounce, the S&P 500 hits 1450, and investment grade and high yield bond spreads narrow by roughly 50 basis points. The only negative return it sees is from bonds with the prediction that the yield on 10-year Treasuries rises to 2.3%.

For its part, Credit Suisse is getting incrementally more bearish, bringing its S&P 500 target down to 1450 from 1470 on Wednesday, mainly because of increased risk of a euro break-up. The firm still likes stocks though.

"Last weekend's events serve as a reminder of how important politics are to markets this year (the fiscal cliff in the US, the leadership change in China, the Euro-area, political influences on the BoJ Bank of Japan," Credit Suisse said, adding later: "Although most risk indicators are neutral (sentiment, risk appetite, insider buying), we think on a 3- and 12-month view equities still have the best risk-reward trade-off among the major asset classes - we stay overweight."

The firm lifted its estimate of the probability of Greece exiting the euro to 15% from 5%, and the chances for a euro break-up to 10% from 5%. Should the euro break-up come to pass, it sees an extreme downdraft in stocks with the S&P 500 dropping down to 1000.

In the immediate, it seems U.S. investors may want to steel themselves for similar bouts of volatility that dominated the action last summer.