BofA's bull-bear gauge hits 9.5 as hedge funds pile into tech

Wall Street's two biggest sentiment gauges are flashing sell signals, yet hedge funds are buying tech stocks at the fastest pace in a month.

Goldman Sachs's sentiment gauge has been in sell territory for three weeks, while BofA's Bull & Bear indicator hit 9.5, triggering a contrarian sell signal.

"Extreme bull positioning says reduce risk exposure," Michael Hartnett, chief investment strategist at Bank of America, said in a note Friday.

The S&P 500 has historically fallen an average of 2% in the three months after a sell signal, with maximum declines reaching 15% to 20%, Hartnett said. The indicator has flashed 17 sell signals since its launch 24 years ago, and stocks have fallen 60% of the time over the subsequent two to three months, according to BofA. Goldman's composite indicator, which aggregates nine positioning metrics across institutional, retail and foreign investors, has shown predictive power for near-term S&P 500 returns, the bank's portfolio strategy team led by Ben Snider said.

The conflicting signals come as the 10-year Treasury yield fluctuates on expectations for Federal Reserve policy, with markets pricing in a 33% chance of a rate hike this month, according to Goldman Sachs. The divergence between institutional warnings and actual fund flows creates an unusually ambiguous signal for equity markets, where the primary risk may be concentrated in individual names rather than the broader index.

Hedge Funds Return to Tech

Despite the sell signals, hedge funds turned net buyers of US stocks for the first time in four weeks, with information technology seeing the largest inflows, according to Goldman Sachs prime brokerage data. Managers focused on covering short positions in semiconductor names, even though the sector remained in net sell territory over the past month. Total leverage rose 1.1 percentage points to 204%, in the fourth percentile of the past year, while net leverage increased 0.7 points to 51.7%, in the 21st percentile — indicating the buying was more about marginal repositioning than aggressive risk-taking.

Options market activity painted a more bullish picture. The put/call ratio dropped to 0.61, the most bullish reading since December 2020, according to Barchart data. Mega-cap technology stocks saw a notable pickup in call option volumes, Goldman's volatility desk reported, while Deutsche Bank's positioning tracker showed mega-cap growth and tech at the 88th percentile over the past year. Insider buying among technology company executives has also increased, a signal that Sentiment Trader data suggests often precedes sustained rallies.

Retail Exits as Volatility Diverges

Retail investors are moving in the opposite direction. Individual stock buying has slowed to the weakest pace in more than six years, according to Vanda Research data, suggesting Main Street investors are stepping back even as institutional flows turn positive.

A structural anomaly in the options market highlights the unusual environment. The gap between individual stock implied volatility and index implied volatility has widened to extreme levels, Deutsche Bank data shows, reflecting very low stock correlation and high dispersion in single-stock returns. That means the market's risk is less about a systemic selloff and more about sharp moves in select names — a regime that rewards stock-picking over passive index exposure.

Momentum strategies, which had been a key driver of the rally, have pulled back from their peaks but have not yet reached extreme downside levels, according to JPMorgan data. Morningstar Wealth Chief Investment Officer Philip Straehl recently flagged the S&P 500 Momentum Index's best two-month stretch since the mid-1990s as a sign of "excessive optimism."

The net effect is a market where institutional sentiment models say one thing, fund flows say another, and the options market says a third. For portfolio managers, the dispersion in single-stock volatility suggests that alpha generation will depend more on stock selection than on directional index bets in the months ahead.

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