Bank of America- A sell signal on U.S. stocks came on for the first time in 2021
The Dow Jones Industrial Average has recently been hitting new highs, but according to a report from Bank of America, a new sell signal has just been triggered in the stock market for the first time since February 2021.
The latest survey of fund managers by Bank of America shows that their cash allocations have decreased from 4.2% to 3.9%, marking the lowest level since that same February 2021.
Bank of America indicates that when cash allocation falls below 4%, it serves as a sell signal. This acts as a contrarian indicator, typically lighting up when investors are overly optimistic in the stock market and cash levels are at a low.
When a sell signal is activated, it often forecasts weakened short-term returns. Michael Hartnett, a strategist at Bank of America, noted, “Since 2011, there have been 11 instances of sell signals, and we saw global stock market returns drop by 2.5% in the subsequent month and by 0.8% in the following three months.”
This sell signal comes at a time when the U.S. stock market is near historic highs, with the Dow reaching a new peak on the 16th. The Bank of America report highlights that investor behavior has been extremely bullish. Hartnett mentioned, “Investor optimism has surged to its highest level since June 20, spurred by the Federal Reserve’s interest rate cuts, stimulus measures in China, and signs of a soft economic landing.” He added that the “bubble” is still expanding.
