Strategists at Bank of America led by Michael Hartnett have indicated that asset allocators have become extremely bullish, a condition that typically serves as a market warning sign.
According to the team, this environment suggests investors should "reduce equity exposure, retreat, or rotate" out of risk assets rather than adding to positions.
In a report on Friday, Hartnett noted that the bank's internal sentiment gauge, the "Bull & Bear Indicator," is flashing a contrarian "sell signal."
This signal is prompted by factors including a significant decline in institutional cash levels, robust inflows into equity funds, and stronger breadth metrics for global stock indices.
The indicator has risen to 9.6, moving further into extreme bullish territory after reaching 8.0 approximately two months ago.
A reading of 8.0 typically signals an overheated market with crowded long positions.
The bank stated that a reading above 2.0 for this indicator signifies a buy signal.
Hartnett affirmed that the "sell signal" from the Bank of America Bull & Bear Indicator remains in effect, as extreme bullish positioning suggests the market may be at a peak.
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