Bank of America says an under-the-radar sell signal is flashing in markets
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- Bank of America says a subtle sell signal has begun flashing in markets: dwindling cash levels.
- Cash reserves fell below a key threshold, which can suggest investors are overly bullish on stocks.
- Early June could be a "ripe" time for investors looking to take profits, strategists said.
A subtle contrarian sell signal has reared its head in markets, Bank of America says.
Global investors have significantly dropped their cash holdings, according to Bank of America, an under-the-radar sell signal that hints that investor sentiment is overly bullish and poised to turn.
Fund managers surveyed by BofA in May dropped their cash levels to 3.9% from 4.3% the prior month. That represents the biggest monthly drop in investors' cash reserves since February 2024, the bank said on Tuesday.
This particular sell signal for markets is triggered when cash levels drop below 4%, the strategists said, suggesting that the measure served as a contrarian indicator that the mood in markets could soon shift.
The drop was largely fueled by investors piling into stocks. Half of fund managers were net overweight stocks, the survey said, the highest allocation to equities by global investors in four years.
"Bottom Line: record rise in FMS equity allocation," strategists wrote. "Bull capitulation almost complete, early June ripe for profit-taking, bond yields to determine degree of pullback," strategists added.
The sell signal in cash coincides with another bearish signal from markets: The Bull & Bear Indicator, Bank of America's in-house contrarian market sentiment gauge, also inched closer to "sell-signal" territory last month.
Investors appear significantly more optimistic about the outlook for markets, despite the ongoing surge in oil prices and fears about inflation still lingering. Sentiment among surveyed fund managers rebounded to its highest level in three months in May, the bank said, citing its measure based on cash levels, stock allocation, and expectations for global growth.
The economic outlook also perked up last month. About 4% of fund managers said they believed the economy is headed for a hard landing, the bank added, down from 9% of investors who expected a global recession in the prior month.
The percentage of investors who think the economy is headed for a "no landing," a situation where the economy continues to expand without interruption, also rose from 32% to 39%.
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