Key Takeaways:
Bank of America’s Bull & Bear Indicator has hit 8.0, triggering a contrarian sell signal, but chief strategist Michael Hartnett advises waiting for two key events before selling what he calls the biggest bubble since the 1880s.
"Bull capitulation is almost complete," Hartnett wrote in his latest ‘Flow Show’ report, adding that early June is "ripe for profit-taking," with the scale of any pullback dependent on long-end Treasury yields.
The indicator, which runs from 0 (extreme bear) to 10 (extreme bull), was pushed to the "sell" level after a record monthly jump in fund manager equity allocations to a net 50 percent overweight, the highest in four years. Cash levels simultaneously fell from 4.3 to 3.9 percent, a contrarian bearish signal. A record 73 percent of surveyed managers now call “long global semiconductors” the most crowded trade on the planet.
Hartnett warned that if rising yields and oil prices were fully priced into equities, the impact would be equivalent to the S&P 500 falling over 1,000 points. However, he argued that a major sell-off is unlikely before historic IPOs from companies like SpaceX and OpenAI are completed, and before a significant policy tightening is triggered by the CPI climbing to 4 or 5 percent.
Hartnett’s report states that the market concentration in AI-related themes has reached approximately 48 percent, a level that surpasses the "Roaring Twenties," the "Nifty Fifty" of the 1970s, and the 1990s tech bubble. The only historical precedent for greater concentration was the railroad bubble of the 1880s, which peaked at 63 percent of total market value.
The sell signal from the Bull & Bear Indicator is the 17th such trigger since 2002. Following these signals, global stocks have historically seen an average loss of 2 to 3 percent over the subsequent two to three months.
Despite the flashing warning signs, Hartnett believes a rush for the exits is premature. He argues that no one will significantly cut their long positions before the massive IPOs of SpaceX and OpenAI are priced, as the underwriting banks would not allow a market crash that would cost them billions in fees.
He also points to rising global capital costs, which are already pressuring peripheral markets. Currencies in Korea, Japan, Indonesia, and India are all near multi-decade or record lows, a classic sign of spreading risk.
For investors looking ahead, Hartnett suggested that emerging markets and commodities remain in a structural bull market, and that consumer stocks represent the best contrarian opportunity after the bubble pops. He added that the best AI trade going forward will be small-cap companies that use the technology to disrupt existing monopolies, similar to the aftermath of the "Nifty Fifty" crash in the late 1970s.
The report suggests investors should prepare for a correction but not act prematurely. Hartnett's focus now shifts to the pricing of upcoming tech IPOs and the next several CPI reports as the definitive triggers for a market downturn.
This article is for informational purposes only and does not constitute investment advice.
