BofA to Investors: Time to Take Profits as Bear Market Signals Flash

Bank of America is telling clients the party may be winding down. Strategists led by Savita Subramanian wrote in a June 5 note that investors should exercise caution on US stocks as an increasing number of “bear market signposts” point to an approaching top, citing “too many red flags.” The message to clients was blunt: take profits.

The signals BofA is watching

Roughly 70% of the bank’s bear-market signals have recently been triggered, in line with the average observed during prior market peaks. Seven of the bank’s 10 bear market indicators have flashed in recent months, with five triggered by April and two more in May.

The S&P 500 was called “statistically expensive on 17 of 20 metrics,” and trades rich versus tech bubble metrics on eight of them. The measures include consumer confidence, growth expectations, M&A scores, credit stress, and tightening indicators like the Fed’s Senior Loan Officer Opinion Survey, which showed consumer demand continuing to soften.

Not a sell-everything call

BofA said it still sees opportunity in S&P 500 stocks, just not the overall cap-weighted index, noting that the indicators point to a broader turndown. Translation: stock-pickers can still work, but beta is where the risk lives.

Subramanian has set her year-end S&P 500 target at 7,100, below the 7,400 area the index has been trading around.

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The call already looks prescient

The S&P 500 had set a record on June 1, four sessions before the note published; by the following Wednesday it was down about 4.5% to 7,267, the Nasdaq had fallen roughly 7% from its June 1 peak, and the Dow was off around 2.7%, or some 1,400 points.

The most leveraged funds suffered the worst routs, with the Direxion Daily Semiconductor Bull 3X fund returning 75.9% in May yet still bleeding $4.1 billion that month, a second straight month of outflows as traders cashed out of the year’s defining rally.

Credit and sentiment cracks

Both of BofA’s credit signals tripped as well, one tracking stress in corporate borrowing markets and the other, from the Fed’s survey of loan officers, tracking whether banks are making credit harder to get, which are early warnings because trouble tends to show up in credit before stocks.

Three of five sentiment gauges also tripped: investors expect stocks to keep rising, analysts have penciled in long-term earnings growth so high that any slight miss disappoints, and dealmaking is booming, which tends to happen near a top when money is cheap and executives are confident enough to make riskier bets.

The other side of the trade

Not everyone reads the signposts as fate; Morgan Stanley called the sell-off healthy, noting that a change in tech’s leadership could extend the bull market rather than end it.

Options market and stocks to watch

Watch BAC itself, as the messenger for this call — sentiment on the big banks tends to shift when their own strategists turn cautious.

Watch SPY and QQQ for follow-through on the cap-weighted index calls; BofA’s 7,100 target sits below current spot, so options flow around key strikes is worth tracking.

Watch NVDA and semiconductor leverage plays, given analysts have penciled in long-term earnings growth so high that even a beat that is not up to expectation disappoints, making single-name gamma sensitive to any guide.

Keep an eye on the broader market news flow for any credit-market wobble, since BofA flags credit stress as the earliest tell.

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