Bank of America's Bull & Bear Indicator has risen to its highest level since June 2021, a period when the pandemic stock rally was at its peak. This indicator, which is a contrarian gauge, flashes a "sell" signal when investor sentiment becomes extremely bullish. The recent uptick moved the indicator from 9.5 to 9.6, suggesting that global stocks could be due for a pullback.
The surge in bullish sentiment is also reflected in Bank of America's monthly survey of fund managers, who collectively oversee $440 billion. This survey revealed that investors are the most optimistic they've been since June 2021. Despite this bullishness, 91% of participants in a recent poll indicated that American stocks are overvalued, marking the highest proportion since 2001. Additionally, about 35% of investors warned that corporations are overinvesting, a record high in two decades of data.
The indicator's "sell" signal has historically preceded market drawdowns. Since 2002, 17 such signals have been triggered, with global stocks experiencing an average drawdown of 2%-3% in the subsequent three months. Maximum drawdowns in these instances have ranged from 15%-20%. Fund managers are also expressing concerns about an AI bubble and inflation risks, and are reportedly cutting their exposure to tech stocks, even as overall allocation to global equities climbed to the highest since February, though a net 16% remained underweight in the US.
