A contrarian signal just flashed and is warning traders that it could be time to get out of the stock market, or at least limit exposure.
Investors are flooding out of cash to buy stocks, with collective cash levels dropping to 3.9% of portfolios, from 4.3%, according to a widely-followed survey of fund managers from Bank of America Securities. The firm considers a drop below 4.0% aggregate cash levels as a sell signal.
The median 4-week loss after the sell signal is triggered has been 1%, according to the bank’s review of 24 sell signals going back to 2011. The worst loss in that time has been 29%, while the best gain was 4%.
“Bull capitulation almost complete,” Michael Hartnett, investment strategist at Bank of America Securities, wrote on Tuesday. “Early June ripe for profit-taking, bond yields to determine degree of pullback.”
On its face, it sound like a bullish signal when investors buy stocks en masse. After all, stocks have surged since their March lows, soaring roughly 19% and the S&P M500 above 7,500 last week for the first time ever, fueled by renewed optimism over artificial intelligence. Global semiconductor companies and the Magnificent Seven companies led the way.
But low cash reserves signal a “bull capitulation,” meaning traders chasing the stock rally will soon run out of dry powder at the same time as real risks continue to plague the market. Less cash in reserve also raises the risk of a sharp drawdown, given that traders have less of a cushion in the event of a pullback.
It also suggests an extreme level of optimism that has sometimes in the past preceded a drawdown. In the same report, BofA Securities found virtually all money managers are bullish on global economic growth, and only 4% anticipate a hard landing, when economies see a sudden slowdown or even a recession.
Tuesday’s market action was just one example of the threats that are still plaguing the market, with oil staying above $110 a barrel, and yields climbing. The yield on the 30-year Treasury bond was last above 5.18%, its highest since 2017, while stocks stumbled. Semiconductor makers like Micron Technology led the latest selloff.
