BofA survey flags contrarian sell signal as bullish indicator hits 9.4

BofA's Bull & Bear Indicator surged to 9.4 out of 10, a level that has historically preceded market corrections.

Global fund managers have turned extremely bullish, with Bank of America's Bull & Bear Indicator climbing to 9.4 — a reading that has historically acted as a contrarian sell signal for equities. Cash holdings dropped to 3.6% of portfolios from 4.1% in June, while US equity allocations rose to a net overweight 24%, the highest since December 2024.

"The BofA Bull & Bear Indicator at 9.4 is in extremely bullish territory, meaning investors should reduce equity and high-beta asset allocations," said Michael Hartnett, chief investment strategist at Bank of America Global Research.

Long semiconductor stocks became the most crowded trade in the latest survey, reflecting the ongoing rotation out of cash and into risk assets. The indicator, which ranges from 1 to 10, has historically flashed a warning when it breaches the 8 level. The current reading of 9.4 suggests that investor optimism has reached levels that typically precede market corrections.

The survey also showed that global growth optimism climbed to a five-month high, while inflation expectations plunged as rate hike fears faded. The combination of rising growth expectations and falling inflation fears has driven the aggressive positioning, but Hartnett's team warned that "since market positioning is already very optimistic, further upside for risk assets this summer may be limited."

The extreme bullish reading comes as a separate divergence in equity markets draws comparisons to the dot-com era. The S&P 500 Constituent Volatility Index, a measure of single-stock volatility, is showing its largest-ever spread against the VIX, according to a June report from the CBOE. The VIXEQ hovered around 50 on Tuesday, up 46% year to date, while the VIX stood at 16, up 13% for the year. Bank of America's global equity derivatives research team noted that a similar divergence was seen in the late stages of the dot-com bubble, adding that "shock risk is real."

The widening gap has been driven largely by the sell-off in the semiconductor sector, as investors rotate out of hot chip names to take profits and seek more attractive areas of the market. The iShares Semiconductor ETF remains up 83% for the year but has tumbled 12% from its late-June peak. The increasing de-correlation of semiconductors from other megacap stocks and software names has pushed correlation between chip stocks and the broader market indexes near record lows.

For portfolio managers, the message from the BofA survey is clear: extreme optimism is a contrarian warning. With the Bull & Bear Indicator near its maximum and cash at minimal levels, the scope for further equity gains this summer appears constrained. The next major test for markets will be the Federal Reserve's July policy meeting, where any shift in forward guidance could trigger a repositioning.

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