Contrarian signals are flashing, warning traders that it may be time to exit the stock market, or at least limit their exposure. Investors have flooded with cash to buy stocks, with overall cash levels falling from 4.3% of portfolios to 3.9%, according to a widely conducted Bank of America Securities survey of fund managers. The company views total cash as a sell signal if it falls below 4.0%. The bank’s research, which looked at 24 sell signals dating back to 2011, found that the median loss in the four weeks following a sell signal was 1%. The worst loss during that period was 29% and the best gain was 4%. “The bulls’ capitulation is almost complete,” Michael Hartnett, investment strategist at Bank of America Securities, said Tuesday. “Early June will be ripe for profit-taking, and bond yields will determine the extent of the pullback.”At first glance, investors buying stocks en masse sounds like a bullish signal. After all, stocks have soared from their March lows, buoyed by renewed optimism about artificial intelligence, and soared about 19% last week, pushing the S&P M500 index above 7,500 for the first time in history. Global semiconductor companies and the Magnificent Seven companies led the way. But low cash reserves signal a “bull capitulation,” and traders chasing rising stocks will soon run out of dry powder while real risks continue to plague the market. Having less cash on hand also increases the risk of sharp drawdowns, as traders have less cushion in the event of a pullback. This also suggests the extreme levels of optimism that have sometimes preceded drawdowns in the past. In the same report, BofA Securities revealed that virtually all asset managers are bullish on global economic growth, with only 4% expecting a hard landing where the economy suddenly slows or even slips into recession. Tuesday’s market action is just one example of the threats still plaguing the market as oil prices hover above $110 a barrel and yields rise. Amid weak stock prices, the yield on the 30-year U.S. Treasury note last rose above 5.18%, the highest level since 2017. Semiconductor makers such as Micron Technology led the recent decline.
