Key facts
- Bank of America's Bull & Bear Indicator, a contrarian gauge of investor sentiment, has risen to 9.6.
- This marks the highest level for the sell signal since 2021.
- The indicator has historically preceded market pullbacks.
- Since 2002, global stocks have experienced an average drawdown of 2%-3% in the three months following a sell signal.
- Potential headwinds include interest rates, with markets pricing in a high probability of a Federal Reserve rate hike before 2027.
- Investor concern over the sustainability of the AI trade is growing, though cash levels remain historically low.
Bank of America's closely watched stock market sell signal, known as the Bull & Bear Indicator, has reached its highest level since 2021, indicating extreme investor bullishness. The indicator, which functions as a contrarian gauge, ticked up to 9.6, signaling a potential market pullback.
The indicator, which first triggered a sell signal in May, is based on factors including hedge fund positions, stock and bond flows, and technical indicators. Historically, such signals have often preceded market downturns. According to a note from a team led by Michael Hartnett, global stocks have seen an average drawdown of 2%-3% in the three months following the 17 sell signals triggered since 2002, with maximum drawdowns ranging from 15%-20%.
Strategists at the bank noted that interest rates are a potential headwind, with markets currently pricing in a 91% probability that the Federal Reserve will raise rates at least once before 2027. Despite growing concerns about the sustainability of the AI trade, investors remain heavily invested in risk assets, with cash levels dropping to a historic low of 3.6% in July, according to the bank's latest fund manager survey.