Bank of America’s “Sell” Signal: A Warning for Risk Assets?

Bank of America's December Global Fund Manager Survey (FMS) is signaling a potential “sell” moment for global equities, as cash allocations among fund managers have dropped to their lowest level in three years—3.9% of assets under management (AUM). This marks the second instance in three months of hitting this contrarian "sell signal" level.

Key Insights:

• Low Cash Levels: The drop in cash allocations below 4% triggers Bank of America's FMS Cash Rule, historically associated with market tops.
• Previous Sell Signals: Past instances of cash levels this low have often preceded major market corrections, including those in early 2002 and February 2011.
• Recent Performance: Historically, following these “sell” signals, global equity returns have seen declines of -2.4% in the month following and -0.7% in the following three months.
• Investor Sentiment: The survey highlights super-bullish sentiment, with fund managers optimistic about U.S. growth prospects driven by expectations surrounding “Trump 2.0” policies and potential rate cuts by the Federal Reserve.
• Sector Preferences: While equities are heavily favored, fund managers are hedging against risks by increasing their allocations to cash, bonds, and consumer staples, while shorting U.S. stocks, technology, and banking sectors.

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