• A contrarian sell signal recently flashed within the stock market, in keeping with Bank of America.

• The drop below 4% in money allocations suggests aggressive stock market investing, BofA said.

• Investors are growing more optimistic about economic growth, but fear geopolitical conflicts and inflation.

A sell signal within the stock market just flashed for the primary time since February 2021, in keeping with a note from Bank of America.

The bank’s fund manager survey revealed that money allocations dropped to three.9% from 4.2%, representing the bottom level since February 2021.

Based on the bank, a drop below the 4% level for money allocations is a sell signal. It is a contrarian sign, because it typically flashes when investors aggressively spend money on the stock market with low money levels.

The sell signal has typically preceded weak returns within the short term.

“Since 2011, there have been 11 prior ‘sell’ signals which saw global equity returns of -2.5% within the 1 month after and -0.8% within the 3 months after the ‘sell’ signal was triggered,” Bank of America strategist Michael Hartnett said.

The sell signal from Bank of America flashes at a time when stocks are trading near record highs. And investors are exhibiting very bullish behavior, in keeping with the note.

“The most important jump in investor optimism since Jun’20 on Fed cuts, China stimulus, soft landing,” Hartnett said, adding that “froth” is on the rise.

Fueling the optimism is expectations that the worldwide economy is on a solid footing and able to grow within the years ahead. The survey saw global growth expectations rise from -47% to -10%, representing the fifth largest jump since 1994.

Meanwhile, 76% of institutional investors surveyed by the bank see a probability of a “soft landing” within the economy, while the prevailing alternative scenario is a “no landing” quite than a “hard landing.”

The most important difference between a soft landing and a tough landing within the economy is how briskly the economy will grow going forward quite than contract in a tough landing scenario.

As to potential risks available in the market, investors are most frightened about geopolitical conflicts, which rose to 33% from 19% last month. Other risks on the radar of investors include a rise in inflation and a possible recession.

Finally, probably the most crowded trade continues to be long the Magnificent Seven mega-cap tech stocks, in keeping with the survey.

“Long Magnificent 7 is taken into account probably the most crowded trade (per 43% of investors) followed by #2 long gold (17%), and #3 long China equities (14%),” Hartnett said.

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