Stocks have further to fall after the market's 'bear hug' rally as the Fed isn't ready to pivot from its aggressive rate policy, Bank of America says

• The Thursday rally in US stocks was a "bear hug" and not yet the start of a sustainable upswing in equities, Bank of America said Friday.

• The firm said the rally was ignited in a market that's oversold and where investors are holding high levels of cash.

• The "Big Low" in the market is coming but there hasn't been enough macro/market pain yet, said BofA's chief US strategist Michael Hartnett.

The stunning rally in US stocks on Thursday represented a bullish "bear hug" that doesn't yet mark the start of a sustainable upswing in equities, said Bank of America researchers on Friday.

Investors are "close to the point where all they want is to be hugged," said Michael Hartnett, the firm's chief investment strategist in a new client note.

The so-called bear hug that transpired — which saw the Dow erase losses and swing higher by more than 1,500 points within a matter of hours on Thursday morning — was the result of extreme oversold conditions, Harnett noted.

Why might investors need a hug? Harnett points to the -34% annualized return on the traditional 60/40 portfolio, which is the worst in 100 years.

Looking forward, Hartnett still sees a "Big Low" coming in markets — but he's still waiting for signs of panic from the Fed. He notes that the economy is still too strong for the central bank to consider cutting rates, which is usually something it does around when the Big Low sets in.

In fact, so far this year, the issue with the Fed has been the historically large rate hikes it's enacted. Considering the recent September inflation reading was bad for pretty much everyone, the central bank doesn't appear close to a pivot. The probability of another hike in December of 75 basis points nearly doubled after the inflation report.

Thursday represented a "decent counter-rally, but ultimate lows ain't seen yet," said Hartnett.

He points specifically to the labor market and manufacturing data, which isn't yet weak enough for the Fed to "fold.

Plus the ongoing "inflation shock ain't over," Hartnett wrote.

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