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Chart 9: In May, the Nasdaq recorded its longest streak of monthly gains Chart 10: Tech valuations seem to be gaining momentum and are now at since 2009 (7M). However, compared to the only other instances of their highest levels since before the GFC but remain far from dotcom longer streaks (‘86, ‘95) the current bull run is still only half the size bubble peaks 60 Longest Jes Bull Runs with calendar monthly returns 60 50 50 40 30 40 20 30 10 50 00 QO 4+ = 100 as of 30-Sep-85 10 80 0 ommwese enmOmnrwwrvownmrnoerTr Mwor oon ww? Ww owowdomooomommmDmdeaecqcroc’rc oqo DTT TT ODD D DD MD MD Q NN NNN NN NN SN === SPX Tech P/E (price to consensus forward 12m earnings expectations) May-86 Bull Run === Oct-95 Bull Run May-17 Bull Run Current Source: BofA Merrill Lynch Global Research. Data from Sep-85 to 31-May-17 Source: BofA Merrill Lynch Global Research. Monthly data from Jan-86 to May-17. In addition to strong price performance, lofty valuations, and exuberant inflows, asset bubbles also tend to have two other hallmarks, best seen through the derivatives lens: (i) asset volatility rising alongside asset prices (Charts 11 & 12), and (ii) declining correlation as assets closest to the source of the bubble decouple from those farther removed (Chart 11). Chart 11: During the 2000s Tech Bubble, Tech vol rose with Tech stocks Chart 12: Historically, in major asset bubbles, realized volatility has and broader market correlations fell as Tech stocks decoupled from tended to rise meaningfully not only after the bubble deflates, but also other large caps — both classic signs of an asset bubble in the run-up to the market peak 10% 5000 1% % Asset bubbles (peak): 60% 2 ary, | *Dow Jones (Sep-29) 1 ; 4000 E 65% 4 + Gold (Jan-80) 50% 3 activist 1 a 3000 S 55% Nikkei (Jan-90) 40% LJ = * Nasdaq 100 (Mar-00) 30% 2000 N 45% 4 *HSCEl (Oct-07) 20% z 2 * Crude oil (Jul-08) ) = 35% 4 * Biotech (Jun-15) “0% >, 1000 aa 0% 0 2% 5 ‘06 ‘OF ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 459% (°] ——NDX ‘Y realized vol ——=SPX 1Y realized cortel SIFSSSAARUS TP VON SLRS NDX (right) Weeks from peak Source: BofA Merrill Lynch Global Research. Daily data from 3-Jan-95 through 31-Dec-03. Source: BofA Merrill Lynch Global Research. SPX correlation = average pairwise realized correlation of all 500 stocks. While Nasdaq 100 (NDX) implied volatility has spiked in recent weeks and now trades in the 94" percentile as a spread to S&P 500 (SPX) implied volatility (Chart 14), the absolute level of NDX 3M implied vol remains historically low (2"¢ percentile since Jun- 09). In our view, at least for now, the spread widening is more of a response to the outsized sell-off seen in Tech stocks on 17-May rather than the volatility market trying to price in the onset of another Tech Bubble. Indeed, the -2.5% drop in the NDX on 17- May was a six standard deviation (60) event relative to trailing realized volatility (and the fourth worst risk-adjusted daily return since 1985), even more extreme than the 50 decline experienced by the S&P. Bankof America <> ; deg docs Merrill Lynch Global Equity Volatility Insights | O06 June 2017 5 HOUSE_OVERSIGHT_023579