Stock market sell signal from BofA at highest level since 2021

Bank of America’s famed stock market sell signal has ticked up again, and is hovering at the highest level since 2021.

Strategists at the bank pointed to the Bull & Bear Indicator, the widely followed market gauge that’s based on investor sentiment. The indicator, which is considered to be a contrarian gauge, flashes a “sell” signal when investors are extremely bullish, and vice versa for a “buy” signal.

The Bull & Bear Indicator ticked up from 9.5 to 9.6 in the last week. That marks the highest level for the sell signal since 2021, right as the pandemic stock rally was at a fever pitch.

The indicator, which first triggered a sell sign in May and is based on factors like hedge fund positions, stock and bond flows, and technical indicators, has often preceded market pullbacks.

Of the 17 sell signals that have been triggered since 2002, global stocks have seen an average drawdown of 2%-3% in the three months that followed, with the maximum drawdown ranging from 15%-20%, a team led by Michael Hartnett wrote on Friday.

Once a buy or sell signal has been triggered, it typically lasts for one to three months, strategists added.

Interest rates are one potential headwind pushing against markets, the bank said, pointing to expectations for a possible Fed rate hike in the coming months. Markets are pricing in a 91% probability that the central bank will raise rates at least once before 2027, according to the CME FedWatch tool.

“Stock investors less worried thus far, do not yet see level of interest rates as threat to ‘Anything But Bonds’ bull market in risk assets, but would be negatively surprised if equity-friendly US admin tolerates hike to help ‘tamp brakes’ on stocks and anti-billionaire rhetoric in run-up to midterms,” the note said.

Investors have grown concerned about the sustainability of the AI trade lately, but are still heavily invested in risk assets, particularly as stocks hover in striking distance of record highs. More global investors said that an AI stock bubble is the top tail risk for markets last month, but remain close to fully invested, with cash levels dropping to a historic low of 3.6% in July, per the bank’s latest fund manager survey.