Bank of America Bull & Bear Index Signals Strongest Sell Alert Since 2021

Bank of America's Bull & Bear Index issued its strongest sell signal since at least 2021, indicating a need for investors to reduce risk exposure. Michael Hartnett, the bank's chief investment strategist, highlighted this extreme bullish positioning in a statement released on Friday. The index combines factors such as hedge fund positions, money flows into stocks and bonds, market breadth, and fund managers' exposure levels. When these indicators show excessive optimism or euphoria, the index signals a sell alert that suggests caution despite positive market sentiment.

This sell signal does not necessarily predict a prolonged or severe market downturn but tends to warn of short-term risk. For example, after the index peaked in February 2023, the S&P 500 dropped over 7% before rebounding 9% by late February. Similarly, the index's peak in May 2010 preceded a rapid 9% market crash, though the broader upward trend continued. Since its inception 24 years ago, the index has generated 17 sell signals. Hartnett noted that following these signals, the MSCI All Country World Index typically declined 2% to 3% over the next two to three months, with 60% of cases showing stock drops and maximum declines ranging from 15% to 20%.

Recent weeks have seen Bank of America warn of a potential S&P 500 correction in the third quarter. Morningstar research also flagged a concerning investor sentiment indicator: the S&P 500 Momentum Index posted its best two-month performance since the mid-1990s in April and May, surpassing dot-com era highs. This momentum index, which holds stocks with recent strong returns, effectively measures the market's Fear of Missing Out (FOMO). Morningstar Wealth's chief investment officer, Philip Strehle, told Business Insider that this suggests possible over-optimism, warranting a cautious market outlook moving forward.