BofA Bull & Bear gauge hits 9.7, first sell signal since 2021

BofA's Bull & Bear Indicator hit 9.7, highest since 2021, triggering a sell signal as strategist Hartnett urged rotation into defensives.

"We remain in a retreat/rotate not reload camp for the summer," said Michael Hartnett, chief investment strategist at Bank of America.

The gauge climbed from 9.4, driven by strong high-yield inflows, tighter global high-yield and AT1 spreads, and improving global stock index breadth. Fund manager survey data shows equity positioning at the 99th percentile, stock flows at the 97th percentile, and hedge fund leverage at the 80th percentile. Money market funds took in $53.7 billion in the week to Aug. 5, while stocks drew $32.9 billion and bonds $23.1 billion.

Hartnett recommends reducing exposure to banks, industrials, and semiconductors — the most cyclically exposed areas — in favor of staples, REITs, small caps, biotech, and the U.S. dollar. The next test comes Aug. 28 at Jackson Hole, where a strong July payrolls print could push the Fed toward a hawkish stance.

Hartnett framed the shift as protection against tightening financial conditions, arguing these areas are less exposed to a potential disappointment of the bullish consensus view that there will be "no macro landing, no Fed hike, no AI capex cut, no DEM midterm sweep."

Fund Flows Show Extreme Crowding

U.S. equities drew $9.6 billion in the week to Aug. 5, annualizing a record $652 billion inflow. Investment-grade bonds logged an 18th consecutive week of inflows at $10.2 billion, while high-yield bonds attracted $4.1 billion — the largest weekly haul since July 2024. Gold took in $900 million and crypto $600 million.

The crowding is most visible in AI-related trades. Semiconductor ETFs saw their first outflow in six weeks at $2.4 billion, and tech funds recorded a $700 million outflow — the first in six weeks — though inflows still annualize at a record $217 billion. Hartnett said this may mark a marginal shift in the most crowded AI trade.

Regionally, Japan logged a ninth straight week of inflows at $2.6 billion, while Europe saw its first inflow in three weeks at $55 million. Emerging-market equities added $8.6 billion despite annualizing a $55 billion outflow, the worst since 2015.

EPS Optimism Supports the Bull Case

Hartnett pointed to surging earnings optimism, with 12-month forward estimates up 33 percent, helped by a $35 billion tariff refund over the past three months that reversed a $75 billion tariff-driven earnings hit from May through July of last year. He also highlighted a positive correlation between payrolls and profits as the reason bond markets are trading off jobs data rather than inflation this year, since AI-driven productivity gains have not translated into broad job losses.

The strategist kept his asset allocation at "long stocks, short bonds," arguing policymakers view the equity market as "too big to fail" given the economy's dependence on the wealth effect and the AI data-center capex boom. U.S. household stock holdings have risen about $7 trillion this year, on top of roughly $18 trillion in cumulative wealth growth over 2024 and 2025.

Three Risk Windows Ahead

Hartnett flagged three key validation points. First, the Aug. 28 Jackson Hole symposium: if July payrolls come in above 125,000 with unemployment below 4.1 percent, the Fed could signal a hawkish tilt, pushing yields higher and pressuring risk assets. If payrolls fall below 50,000 with unemployment above 4.3 percent, rate-cut expectations would strengthen, favoring duration assets.

Second, AI capital expenditure sustainability. If the Roundhill Magnificent Seven ETF (MAGS) breaks below $70, it could signal the AI capex expansion thesis is under threat. Third, the Bull & Bear Indicator itself: at 9.7, near the 10-point ceiling, the risk-reward for chasing equities has deteriorated.

The U.S. 10-year Treasury yield stood at 4.655 percent, while gold traded at $4,324 an ounce, up nearly 2 percent. Hartnett said booms and bubbles typically end when rising bond yields and a falling dollar force a fiscal policy U-turn, with "up-in-yields, down-in-banks" price action serving as an early warning sign.

This article is for informational purposes only and does not constitute investment advice.