"All sell signals in the US stock market have been triggered!" Bank of America's Hartnett: But the real trigger is it"

Recently, the U.S. stock market has been rising rapidly, with the Nasdaq hitting new highs repeatedly. However, Michael Hartnett, chief investment strategist at Bank of America, stated that all of the bank's proprietary trading rules have triggered sell signals, indicating that the market may face a correction. The stock market, which has been rising steadily in 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 Bank of America's fund manager surveys on cash rules, global breadth rules, and global fund flow trading rules have all issued sell signals. Among them, the fund manager's cash-to-asset management ratio has dropped to 3.9%, reaching a sell signal level. Historical data shows that after such signals are triggered, the S&P 500 index typically falls by an average 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 30-year U.S. bond yield surpasses 5% and volatility spikes, market sentiment could shift from "risk appetite" to "risk aversion." At the same time, behind the rise in U.S. stocks lies hidden concerns - market breadth has hit historic lows, and signs of economic slowdown are emerging. Furthermore, a major variable is President Trump's interference in the relationship between the White House and the Federal Reserve, potentially repeating the policy disasters of the 1970s. Three major sell signals have been triggered simultaneously Hartnett stated that the results of the monthly "Fund Manager Survey" released earlier this week showed that after a wave of panic selling on Wall Street three months ago, market sentiment has now experienced a record bullish reversal, with fund manager risk appetite reaching unprecedented highs. However, in Bank of America's proprietary trading system, three key indicators have all reached sell thresholds. Institutional investors' cash-to-asset management ratio has dropped to 3.9%, triggering a sell signal. Of the 15 similar signals since 2011, the S&P 500 index subsequently fell by an average of 2%. Regarding global breadth rules, the proportion of MSCI global equity index trading prices above the 50-day and 200-day moving averages is 64%, down from 80% last week, below the sell signal level of 88%. Global fund flow trading rules show that over the past four weeks, global stock and high-yield bond inflows as a percentage of asset management have decreased to 0.9%, down from 1.0% last week, triggering a sell signal. The simultaneous triggering of these technical indicators is rare in Hartnett's analytical framework and typically signals a directional adjustment in the market. Bond market poses key risk point Hartnett emphasized that the bond market, rather than the stock market, could be the trigger for the next round of adjustment. Bond market volatility often precedes stock market adjustments, making it a critical leading indicator. The 30-year U.S. bond yield briefly crossed 5% again this week, particularly during the panic surrounding concerns about Trump possibly firing Powell. Currently, 30-year bond yields are close to the "breakthrough" levels, with the UK at 5.6%, the U.S. at 5.1%, and Japan at 3.2%. As yields have not yet hit new highs and the MOVE index remains around 80, the market is still in a risk-taking mode. Once long-term bond yields hit new highs and the MOVE index rises above 100, Hartnett will shift to a risk-averse stance. Market breadth deteriorates to historic extremes While the stock market hits new highs, market breadth is at historic lows. Equal-weighted S&P 500 index relative to the S&P 500 is at a 22-year low, the Russell 2000 index relative to the S&P 500 is near a 25-year low, and the value-to-growth stocks ratio is at a 30-year low. This divergence indicates that the U.S. economy is slowing down or that the U.S. stock market is in a bubble. In contrast, in more normal global stock markets, value stocks and small-cap stocks outperform large-cap stocks. Hartnett believes that this extreme market concentration reflects investors' excessive reliance on a few tech giants, while ignoring the broad deterioration in economic fundamentals. 1970s policy conflicts resurface The policy disagreements between Trump and Powell over interest rate cuts have led Hartnett to recall a historical repeat of 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, with unemployment at 6% and CPI at 4%. Then-Fed Chairman Arthur Burns subsequently cut rates by 225 basis points from August to December, triggering a cycle of prosperity followed by collapse. The market initially fell, the dollar depreciated by 5%, the S&P 500 index fell by 9%, and U.S. bond yields dropped by 70 basis points. However, in 1972, a year later, 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 predicts that if Powell is forced to resign, the market will repeat a similar policy cycle. This article is reproduced from "Wall Street News," author: Zhu Xueying; GMTEight editor: Liu Jiayin.