iStock;Rebecca Zisser/BI
According to Bank of America, a contrarian sell signal has recently flashed in the stock market.
BofA said its cash allocation below 4% suggests active investment in the stock market.
Investors are increasingly optimistic about economic growth, but are concerned about geopolitical conflicts and inflation.
The stock market flashed a sell signal for the first time since February 2021, according to a note from Bank of America.
Cash allocation fell to 3.9% from 4.2%, the lowest level since February 2021, according to the bank’s fund manager survey.
The bank said a drop below the 4% level of cash allocation would be a sell signal. This is a contrarian sign and typically flashes when investors are actively investing in the stock market with low cash levels.
Sell signals usually precede weak returns in the short term.
Michael, a strategist at Bank of America, said, “Since 2011, there have been 11 ‘sell’ signals, and global stock returns have declined -2.5% in the first month and -3 months after the ‘sell’ signal was triggered. It was -0.8%.” Hartnett said.
Bank of America’s sell signal flashes when the stock is trading near all-time highs. And, according to the note, investors are exhibiting very bullish behavior.
“Investor optimism on Fed rate cuts, Chinese stimulus and a soft landing is at its biggest rise since June 2020,” Hartnett said, adding that “foam” is increasing.
Fueling the optimism is the expectation that the global economy is on solid footing and poised to grow in the coming years. The survey found that global growth expectations rose from -47% to -10%, the fifth largest increase since 1994.
Meanwhile, 76% of institutional investors surveyed by the bank see a “soft landing” possible for the economy, although the more common alternative scenario is a “no landing” rather than a “hard landing.”
The main difference between a soft landing and a hard landing for an economy is how fast the economy will grow in the future, rather than shrinking in a hard landing scenario.
When it comes to potential market risks, investors are most concerned about geopolitical conflicts, rising to 33% from 19% in the previous month. Other risks investors are watching include rising inflation and the possibility of a recession.
Finally, the research shows that the most crowded trades continue to be the Magnificent Seven’s mega-cap tech stocks.
“Long Magnificent 7 is considered the most crowded trade (per 43% of investors), followed by long gold (17%) in second place and long Chinese stocks (14%) in third place. ” Hartnett said.
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