Last year, bearish positioning was “markets’ best friend.” In 2024, by contrast, positioning is poised to go from “tailwind to headwind.”

That’s according to BofA’s Michael Hartnett who, in the latest installment of his popular weekly “Flow Show” series, spent some time editorializing around the bank’s “proprietary trading rules,” a set of models designed as contrarian indicators.

The most famous of those is the “Bull & Bear Indicator,” which moved ever closer to flashing a contrarian “sell” signal this week. The indicative metric rarely misses if it misses at all.

While the “B&B” doesn’t have an especially long history, it backtests very well (see the figure on the right-hand side below) and boasts a more or less perfect track record since its inauguration. The last unequivocal contrarian “buy” signal was in October of 2022, when the S&P troughed for the cycle. The metric also dipped into “buy” territory in October of 2023, just ahead of the November/December “everything rally.” It flashed a contrarian “sell” signal a couple of weeks before “Volmageddon” roiled the VIX complex in February of 2018. And on and on. You get the idea.

As the figure on the left (above) shows, the current reading is 6.8. Again, that’s close to a “sell” signal, but as the old saying goes, close only counts in horseshoes and hand grenades.

We’re “not quite there yet,” Hartnett remarked, adding that investors “mustn’t forget the old market adage” that says “tops are a process, lows are a moment.” Human nature means “fear [is] so much easier to reverse than greed,” he went on. Wise words which, I’d gently note, would’ve served Hartnett well in 2023, when he was generally (but not emphatically) bearish in the face of a rally. It worked out ok for BofA’s clients, though. Savita Subramanian, who has the bank’s official house S&P call, was generally bullish.

Hartnett pointed to the whole suite of BofA trading rules, most of which are close to “sell” signals, not surprising given the rapidity of the move from SPX 4000 to 5000, he said, on the way to reiterating that it’ll take a further drop in cash levels, more inflows to emerging market assets, a bullish turn in hedge fund positioning and a rebound in Hong Kong shares to push the Bull & Bear Indicator over the line.

As for what could burst the ostensible equity bubble, Hartnett was clear. Bubbles “show little respect for positioning or valuation,” he wrote. “They solely respect policy and real rates.”

The figure above is just real 10-year yields, annotated. Note that the US downgrade Hartnett references in the last annotation happened on August 1. The long-end selloff which unfolded over the subsequent three months pushed yields to cycle highs in late October.

Hartnett cited a “growing cohort of investors” in suggesting that market participants have come to believe there’s “no stopping” equities unless and until US reals move back to those highs around 2.5% “at minimum,” as he put it. 10-year reals are 1.85% currently.