Bank of America Securities has issued a warning in its latest Flow Show report, stating that current market sentiment is in an extremely optimistic zone. The breach of two key technical levels could act as a catalyst for a summer sell-off in risk assets. Concurrently, this week's fund flow data shows several concerning reversal signals, indicating an acceleration in market structural shifts.
Chief Investment Strategist Michael Hartnett explicitly stated in the report that a genuine summer "risk-off" scenario would be triggered if the "Magnificent Seven" ETF (MAGS) falls below $60, or if the Australian Dollar/Japanese Yen (AUDJPY) exchange rate breaks below 110. These two levels are viewed as core supports for the current market mood. A simultaneous breach of both would likely force a concentrated unwinding of the extreme long positions that have accumulated.
This week's fund flow data already reveals significant cracks. U.S. equities experienced their first net outflow in 13 weeks, amounting to $8.5 billion. The technology sector saw a record weekly net outflow of $9.3 billion. Bank of America's Bull & Bear Indicator dipped slightly from 9.2 to 9.1, continuing to flash a "sell signal." The bank's data shows that since 2002, this indicator has triggered 17 sell signals, after which global equities have, on average, declined 2% to 3% over the following two to three months, with maximum drawdowns potentially reaching 15% to 20%.
Two Critical Levels: MAGS and AUDJPY
Bank of America identifies the $60 level for the MAGS ETF (which tracks the "Magnificent Seven" tech stocks) and the 110 level for AUDJPY as core indicators for gauging summer risk sentiment.
The MAGS ETF is one of the primary vehicles for concentrated bullish sentiment. The report notes that a drop below $60 would signal a substantial loss of confidence in mega-cap AI technology stocks, potentially sparking a broader sell-off in risk assets.
AUDJPY is a classic proxy for global risk appetite. The AUD/JPY exchange rate typically strengthens during periods of global economic expansion and weakens when safe-haven sentiment rises. The bank points out that a break below 110 would be a significant catalytic signal for "summer risk aversion," noting that historically, several major market upheavals (including September 2001, October 2007, and 2008) were accompanied by sharp declines in this exchange rate.
Bull & Bear Indicator Persists with Sell Signal
Bank of America's Bull & Bear Indicator fell from 9.2 to 9.1 this week but remains in the "extremely bullish" zone (out of a maximum of 10). The "sell signal" was triggered in May of this year and remains active.
Analyzing the indicator's components, the Fund Manager Survey (FMS) positioning component is at the 100th percentile, indicating "extreme bullishness." The bond inflows component is at the 81st percentile, also extremely bullish. The equity inflows component is at the 74th percentile, and the credit market technicals component is at the 75th percentile. The slight decline in the overall indicator this week was primarily due to net equity outflows and a widening of high-yield/AT1 bond spreads.
Historical back-testing by the bank shows that following the 17 previous sell signals, global equities fell by an average of 2% to 3% over two to three months, with a hit rate of approximately 60%. In extreme scenarios, the maximum drawdown reached 15% to 20%.
Multiple Reversal Signals in Fund Flows
This week's global fund flow data shows a clear structural shift, with several previously persistent trends experiencing their first reversals.
For equities, U.S. stocks recorded their first net outflow in 13 weeks, with $8.5 billion exiting, following a record weekly net inflow of $119.2 billion just the prior week. The technology sector saw a record weekly net outflow of $9.3 billion, after a $19.2 billion net inflow the previous week. In government bonds, there was a net outflow of $94 million, the first in nine weeks.
Simultaneously, capital appears to be rotating from tech giants into sectors like small- and mid-cap stocks, Real Estate Investment Trusts (REITs), and infrastructure. REITs recorded their largest weekly net inflow since March 2024 ($900 million). Infrastructure saw a $1.5 billion net inflow, the highest in six weeks. The energy sector, however, experienced its largest weekly net outflow since April 2025 ($1.5 billion).
The bond market recorded its 61st consecutive week of net inflows, attracting $16.6 billion this week. Investment-grade bonds, high-yield bonds, and emerging market debt all continued to see inflows.
High Margins Support Stocks, But Risks Are Building
Bank of America notes that the S&P 500's current 16% operating margin is the core foundation sustaining the market's "preference" for equities, as high margins have historically been strongly correlated with positive stock market returns.
However, the report also cautions that liquidity flowing out of mega-cap AI tech stocks is rapidly moving into sectors like semiconductors, small- and mid-caps, residential housing, and REITs. This rotation is interpreted as the market positioning early for an expected policy shift under the Trump administration towards "affordability."
Year-to-date cross-asset performance shows commodities leading with a 32.7% gain, followed by emerging market equities up 24.5%, the S&P 500 up 8%, while gold is down 8.1% and Bitcoin has fallen a sharp 30.5%.
New Fed Chair Warsh: The Contrarian Bet for Bond Bulls
The report also reviews market performance since the new Federal Reserve Chair, Kevin Warsh, took office. Since his term began on May 22 of this year, U.S. Treasuries have gained 3.2%, while the S&P 500 has declined 1.6%.
Bank of America compares Warsh to a select few Fed chairs under whom bond yields declined historically, including Eccles, Volcker, Greenspan, and Bernanke. The report notes that although Warsh has been characterized by the market as a "new hawk," he has so far failed to convince any investors to abandon the core allocation logic of "staying away from bonds." The bank believes that going long on long-dated U.S. Treasuries remains the most contrarian long-term trade in the current market.
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