Sell!

Not investment advice. Do your own research. Consult your financial advisor whose office in the local strip mall used to be a TCBY.

With the usual disclaimers, BofA’s pseudo-famous Bull & Bear indicator is very close to registering a contrarian “sell” signal again. If you’re inclined to ask, “‘Again’? Hasn’t it been below ‘extreme bull’ levels for the entirety of the AI bubble?” the answer’s “yes.” Read on.

The bank recently “revamped” its flagship indicative metric to better “reflect market structure and investor liquidity and risk preferences,” as Michael Hartnett put it.

More specifically, the updated measure incorporates “the rise of ETF investing, changing beta of equity sectors, evolving hedging strategies [and] better measures of risk-taking in credit markets.”

The figure below plots the new and improved version with the old model. (The annotation, in red, is mine.)

I don’t see any use dancing around what appears obvious to this observer: The old model belied the AI bubble, so they changed the methodology just in case.

What other conclusion is anyone supposed to draw here? That indicator loitered persistently near neutral territory despite record-high stock prices, record-rich forward equity multiples and record-tight credit spreads. If it all fell apart overnight, BofA’s “infallible” contrarian indicator would’ve failed to flag the danger.

Rather than see his beloved metric discredited, Hartnett overhauled it, and I gotta tell you: It looks like an exercise in goal-seeking to me. Look at the chart above. Do you see any material difference in those two indicators before ~2023/2024? Because I don’t. They wanted a Bull & Bear Indicator which reflected the possibility that markets have overshot to the bullish side during the AI frenzy, so they created one.

Anyway, the figures below give you a sense of current readings on the “revamped” metric —  “Bull & Bear Indicator 2.0” as Hartnett dubbed it.

As the right-most figure shows, the new and improved indicator flashed multiple “extreme bull” readings recently, including a nosebleed 8.9 on October 1.

That print — the 8.9 reading — was indicative of the most extreme bullish sentiment since February of 2018 and February of 2020, which presaged Volpocalypse and Apocalypse, respectively.

At 7.8, the current reading isn’t quite a contrarian “sell.” The threshold’s still 8.0. But if the bubble bursts tomorrow, BofA can always just release Bull & Bear 3.0, which will of course have registered 9.9 the day before the crash.