Bank of America Hartnett: Regarding the US stock market, all sell signals have been triggered, but

Recently, the US stock market has surged, with the Nasdaq repeatedly hitting new highs. However, Michael Hartnett, Chief Investment Strategist at Bank of America, stated that all proprietary trading rules of the bank have triggered sell signals, indicating that the market may face a correction. The stock market, which has been rising continuously over the past few weeks, has now reached critical technical thresholds, with multiple indicators showing that risks are accumulating.

In the latest "Flow Show" report, Hartnett pointed out that the Bank of America fund manager survey cash rule, global breadth rule, and global fund flow trading rule have all issued sell signals. Among them, the proportion of cash held by fund managers relative to assets under management has dropped to 3.9%, reaching a sell signal level. Historical data shows that after such signals are triggered, the S&P 500 index averages a decline of 2%.

However, it is worth noting that Hartnett believes the real trigger for a sell-off may not be in the stock market, but in the bond market. Once the yield on 30-year US Treasuries breaks above 5% and hits new highs, with volatility soaring, market sentiment will shift from "risk appetite" to "risk aversion." Meanwhile, there are hidden concerns behind the rise of US stocks—the market breadth has reached a historical low, and signs of economic slowdown are emerging.

A larger variable is Trump's intervention in the relationship between the White House and the Federal Reserve, which could replay the policy disasters of the 1970s.

Three Major Sell Signals Triggered Simultaneously

Hartnett stated that the results of the monthly "Fund Manager Survey" he released earlier this week show that after Wall Street experienced a wave of panic selling three months ago, market sentiment has undergone a record bullish reversal, and fund managers' risk appetite has reached unprecedented highs.

However, in Bank of America's proprietary trading system, three key indicators have all reached sell thresholds.

The proportion of cash held by institutional investors relative to assets under management has dropped to 3.9%, triggering a sell signal. Among the 15 similar signals since 2011, the S&P 500 index subsequently averaged a decline of 2%.

Regarding the global breadth rule, the proportion of stocks in the MSCI global index trading above the 50-day and 200-day moving averages is 64%, down from 80% last week and below the 88% sell signal level.

The global fund flow trading rule shows that the inflow of funds into global stocks and high-yield bonds over the past four weeks accounted for 0.9% of assets under management, down from 1.0% last week, triggering a sell signal.

The simultaneous triggering of these technical indicators is relatively rare in Hartnett's analytical framework and typically indicates that the market will undergo directional adjustments.

Bond Market as a Key Risk Point

Hartnett emphasized that the bond market, rather than the stock market, may become the trigger point for the next adjustment. The volatility in the bond market often precedes adjustments in the stock market, making it a key leading indicator. **

The 30-year U.S. Treasury yield briefly surpassed 5% again this week, particularly amid market panic over concerns that Trump might fire Powell.

Currently, the 30-year bond yield is approaching "breakthrough" levels, with the UK at 5.6%, the U.S. at 5.1%, and Japan at 3.2%. As yields have not yet reached new highs and the MOVE index remains around 80, the market still maintains a risk-on stance.

Once long-term bond yields reach new highs and the MOVE index rises above 100, Hartnett will shift to a risk-off position.

Market Breadth Deteriorates to Historical Extremes

While the stock market hits new highs, market breadth is at historical lows. The equal-weighted S&P 500 index is at a 22-year low relative to the S&P 500 index, the small-cap Russell 2000 index is close to a 25-year low relative to the S&P 500 index, and the value stock to growth stock ratio has reached a 30-year low.

This divergence indicates that the U.S. economy is slowing down or that U.S. stocks are in a bubble state. In contrast, in the global stock markets where sentiment is more normalized, value stocks and small-cap stocks are outperforming large-cap stocks.

Hartnett believes that this extreme market concentration reflects investors' excessive reliance on a few tech giants, while ignoring the widespread deterioration of economic fundamentals.

Policy Conflicts of the 1970s Resurface

The policy divergence between Trump and Powell regarding interest rate cuts reminds Hartnett of a historical replay from the early 1970s. On August 15, 1971, Nixon announced the "New Economic Policy," ending the Bretton Woods system and implementing wage-price freezes and a 10% import tariff, at which time the unemployment rate was 6% and CPI was 4%.

Then-Federal Reserve Chairman Arthur Burns subsequently cut interest rates significantly by 225 basis points from August to December, igniting a boom-and-bust cycle. The market initially fell, the dollar depreciated by 5%, the S&P 500 index dropped by 9%, and U.S. Treasury yields fell by 70 basis points. However, a year later in 1972, the S&P 500 index rose by 11%, and the dollar further depreciated by 8% before Nixon's re-election in November

Based on this, Hartnett expects that if Powell is forced to resign, the market will replay a similar policy cycle.

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk