The "sell" signal in the US stock market: everyone has bought in!
Bank of America’s Hartnett pointed out that since June 2020, overall sentiment on Wall Street has surged, leading traders' cash levels to drop to a record 3.9%, which is seen as a "sell signal." This signal, after being triggered 12 times in the past, typically results in a global stock return of -2.4% within one month and -0.7% within three months. Although false alarms do occur occasionally, most signals have triggered significant sell-offs
Bank of America’s Hartnett believes:
Overall sentiment has surged since June 2020, and the excitement among Wall Street professionals has spiraled out of control...
Ultimately leading to traders' cash levels (i.e., no longer having "off-market funds") plummeting to record lows, as they shifted all their funds into stocks.
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Specifically, FMS cash levels dropped from 4.3% of AUM to 3.9%, marking the lowest level since June 2021. (Figure 1)
“FMS cash allocation only represents a significant top for risk assets when close to the December 2024 level (January to March 2002, February 2011),” FMS cash trading rules stipulate that 3.9% = 'sell signal'.
How accurate is this signal? Hartnett wrote, since 2011, there have been 12 previous 'sell' signals, which led to a global stock (ACWI) return of -2.4% within one month of triggering the 'sell' signal, and a global stock (ACWI) return of -0.7% within three months of triggering the 'sell' signal. Therefore, while occasional false alarms occur (all in 2021), most signals led to some very significant sell-offs. (Figure 2)
