BofA: Bull & Bear Indicator falls back to 7.4, sell signal ends but short-term stance remains defensive

BofA: Bull & Bear Indicator falls back to 7.4, sell signal ends but short-term stance remains defensive Bank of America released its latest weekly fund flow report on October 15. The report noted that BofA's Bull & Bear Indicator has pulled back, ending the market sell signal previously triggered. However, Bank of America has not turned fully optimistic, warning that market risks should still be watched in the coming weeks. In 2026, fund inflows into multiple global asset classes hit records, but emerging market currency depreciation, Federal Reserve policy, and credit changes in the AI supply chain remain key variables affecting the market. 2026 major asset class returns diverged: crude oil led gains, while bonds and gold underperformed The report showed that in US dollar terms, major asset classes posted clearly divergent year-to-date performance in 2026. Crude oil led by a wide margin with a 70% gain; US equities and global equities also delivered positive returns, rising 13.1% and 10.2%, respectively; the US dollar and cash also recorded positive returns. Bonds, gold, and cryptocurrencies weakened overall. Among them, high-yield bonds edged down 0.9%, investment-grade bonds fell 3.2%, government bonds dropped 4.4%, gold declined 4.5%, and Bitcoin fell 6.1%. Record inflows into risk assets Bank of America noted that after a period of extreme optimism during the summer, market sentiment has cooled somewhat, but asset allocation institutions have not reduced their risk asset positions. In 2026, multiple fund flow data points set historical records: Global equity annualized inflows reached $1.3 trillion, of which US equity annualized inflows were $636 billion; investment-grade bond annualized inflows were $480 billion; technology-themed funds remained highly popular, with annualized inflows of $196 billion; South Korean equity annualized inflows were $76 billion. Consumer-themed funds were one of the few sectors to see outflows, with annualized outflows of $18 billion. In terms of single-week fund flows, equities saw net inflows of $64.5 billion, bonds saw net inflows of $11.8 billion, and gold saw slight inflows of $100 million; cryptocurrencies saw $600 million in outflows, while cash saw $53.1 billion in outflows. On the price side, bond yields fell in October, which the report said could improve US equity market breadth in the fourth quarter. Currently, many S&P 500 constituents are down from their 52-week highs: 355 stocks are down 10%, 188 are down 20%, and 93 are down as much as 30%. Some emerging market currencies approach historic lows Pressure on emerging market currencies is becoming more prominent. The Indian rupee, Indonesian rupiah, and Turkish lira are at or near historic lows, while the Japanese yen is only 3% away from a 40-year low. Japan, Turkey, Indonesia, and India together have a combined population of 2 billion. Over the past five years, the Turkish lira has depreciated 81%, the Japanese yen has depreciated 28%, and both the Indian rupee and Indonesian rupiah have depreciated 21%. The report noted that sharp depreciation of local currencies has historically been unpopular at the social level. Bull & Bear sentiment indicator pulls back: sell signal ends, but conditions for bottom-fishing have not yet been met BofA's Bull & Bear Indicator is a widely watched contrarian sentiment indicator, with a range of 0-10. The rule is that a reading above 8 triggers a sell signal, while a reading below 2 triggers a buy signal. The latest report showed that the indicator fell from 8.1 to 7.4, officially ending the sell signal that began on May 26, and is currently in neutral territory. Multiple factors drove the indicator lower: global equity market breadth weakened; hedge funds leaned short on crude oil and S&P 500 futures; bullish sentiment in gold futures cooled; and fund flows into high-yield bonds and emerging market bonds weakened. Large inflows into the technology sector partially offset these bearish factors. Market breadth data showed that 52% of global equity indices are currently oversold, meaning prices are below their 50-day and 200-day moving averages, the highest share since April 2025. According to BofA's breadth contrarian rule, a buy signal for risk assets is only triggered when 88% of global indices enter oversold territory. The report judged that this condition will be difficult to meet in the short term unless US, Taiwan, and Brazilian stock markets see another 6%-10% pullback. BofA view: stay defensive in the short term, AI remains the market's main theme in 2027 The report argued that the next 3-4 weeks should lean toward risk aversion. Factors constraining the market include: US real yields remaining high at 3%; BofA's view that the Federal Reserve needs to raise rates on October 28; geopolitical conflicts between the US and Iran and between Russia and Ukraine disrupting oil prices; rising risk of a Democratic landslide in the US midterm elections; and concerning price action among AI spenders and lenders. In the report's scenario assessment, a Fed rate hike in October could restore policy credibility. US CPI has remained above the 2% inflation target for 66 consecutive months. After a rate hike is implemented, long-end US Treasury yields are expected to fall by another 20 basis points. As long as panic over AI financing eases, it could limit the downside for risk assets. At the trading level, the report recommended increasing exposure to assets that benefit from peak yields, including small-cap stocks and REITs, with particular attention to the consumer discretionary sector. BofA's October fund manager survey showed that institutional underweight positioning in consumer discretionary is the highest since July 2008. For the technology sector, the report did not recommend adding exposure. The survey showed that current institutional overweight positioning in technology is the highest since August 2020, and the market has formed a consensus expectation of a "2027 AI bubble." The report expected that if semiconductor prices continue to rise, investors may return to the technology sector in mid-November. Over the long term, the report maintained a bullish view on gold, commodities, and emerging markets, while recommending reducing long-term underweight positions in bonds.