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May 19 2015, 06.50am GMT


Bank of America Merrill Lynch analysts forecast a dull summer this year for stocks advising investors to add some cash and gold to their portfolios this season.

Analysts from the Bank of America are portraying a dismal picture for investors within the next couple of months including market corrections, despite not outright calling for a bear market.

The Wall Street Company warned that markets will see a horrific summer due to investors being trapped in a “Twilight Zone,” the period of transition between the close of quantitative easing and the 1st rate increase by the Federal Reserve, in efforts to normalize fiscal policy.

In the meantime, investors can expect average returns, correlation breakdowns, flash crashes and volatile trading, says Michael Hartnett a chief investment officer.

Hartnett further advised to reduce risk instead of maximizing returns for the middle point of the year, adding that it may be a “lose-lose” for risk assets this summer.

That said, broad economic trends may get better which could see the Fed hike interest rates for the 1st time in around ten years, causing temporary volatility. These analysts from the Bank of America say that, more negatively on the other hand, for consensus positioning, the macro does not recover, in this case then earnings per share (EPS) downgrades drag down risk-assets further.

Hartnett predicts that investors will start to ease up on relatively risky type assets. The Wall Street firm further sees 5 year German bunds yield 0.2% and 2% for the 10-year Italian, 20 on VIX and for the S&P 500 index (SPX), around 2000 in the 2nd quarter.

Besides the previously mentioned cash and gold to ready oneself for the summer, some analysts further recommend purchasing the so-called put spread tied to the S&P 500. This put-spread trade simply allows the investor to use a complex derivatives trade and to predict the rise or fall of an underlying asset while using yet another bet to hedge the risk of the original one. In addition, the Bank of America recommends betting on a put spread contingent on increased rates, hedging the risk of an interest rate hike from the Fed despite the insufficient signs that the U.S. economy is growing stronger.

MT4 Chart: Bank of America

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