For the third consecutive week, a popular Wall Street composite measure of investor sentiment registered a contrarian “sell” signal.

With the fate of the S&P’s weekly win streak, already one of the longest in a quarter century, hanging in the balance, BofA’s pseudo-famous “Bull & Bear Indicator” hit 8.7, up from 8.5 the prior week, as inflows continued to junk bonds, emerging market credit and global equities, which’ve hauled in $377 billion on net so far this year.

The figures below show you the indicator, the components and the history of 17 “sell” signals since 2002. Note that the metric ticked 9.6 in February of this year, just before the US and Israel attacked Iran. It also registered 9.6 in February of 2020, just before the pandemic.

As the bank’s Michael Hartnett reminded investors, the average loss for global stocks over two to three months following “sell” signals is 2-3% with a hit ratio of ~60% and max drawdowns of 15-20%.

There are, of course, any number of caveats, including all the fine print which says this “rule” isn’t a rule, nor a benchmark, nor should it be considered any sort of market mechanism and on and on.

You know how bank disclaimers go: “This is a turtle. The first thing you need to understand about this turtle is that it’s not a turtle and shouldn’t be confused with one, nor relied upon to behave like one.”

Jokes aside, Hartnett was quick to repeat the old market adage that says “tops are a process, lows are a moment.” Greed, he remarked, is “harder to reverse than fear,” and another of the bank’s indicators — a breadth rule that suggests caution when 88% of global equity benchmarks are overbought — isn’t anywhere near flashing a red light.

In the same piece, Hartnett noted that 46 out of 68 global central banks are either overshooting their inflation target currently or are in midpoint of their respective bands. The Fed’s obviously one of those central banks, and some fear Kevin Warsh, erstwhile hawk, will prove to be every bit as obsequious vis à vis Donald Trump as Warsh swears he won’t be.

As discussed here on Thursday, capex booms typically push up the neutral rate, which many believe reset higher in the 2020s even before the AI arms race began. If that’s the case, rates may already be too low, to say nothing of where they’d sit versus medium run neutral in the (for now unlikely) event Warsh manages to herd enough cats to get a cut in between June and year-end.

The figure on the left gives you a sense of what history says about forward SPX returns when headline CPI tops 4%, as it very well might in next week’s BLS release. It doesn’t always turn out bad for stocks three and six months hence, but when it does, the drawdowns can be quite pronounced.

The figure on the right, above, is familiar: It’s an updated version of Hartnett’s forward-looking CPI scenarios under various assumptions for the MoM prints. Anything warmer than a 0.2% average for the monthly readouts results in all-items price growth exceeding 4%. It’s not implausible that headline CPI will be 5% by the time the mid-terms roll around.

Hartnett quoted Warsh who, during a 2024 interview with Larry Kudlow, said, “Central bankers around the world…seem more comfortable with inflation closer to 3% than I wish were the case. That’s very dangerous stuff. We can have an economic boom in that scenario, but there’ll be a high price to pay.”

In March of 2010, Warsh delivered a speech to the “Shadow Open Market Committee” called “An Ode to Independence.” Here are a couple of choice excerpts:

Central banks must take their own counsel. I am confident that any attempt to influence inappropriately the conduct of Fed policy would yield a strong and forceful rebuke by Fed officials and market participants alike. The only popularity central bankers should seek, if at all, is in the history books.

Independence in the conduct of monetary policy is at the core of advanced modern economies. And it can be too easily forgotten by those who have only known its benefits. If the Federal Reserve lost its independence, its hard-earned credibility would quickly dissipate. The costs to the economy would be incalculable: Higher inflation, lower standards of living and a currency that risks losing its reserve status.

Now more than ever, market participants are watching the relationship between central banks and their governments. They are keenly gauging whether changes in conditions, policies or practices pierce the veil of central bank independence. Central bankers the world over must demonstrate that we are worthy of this moment, and will be steadfast protectors of our institutions’ credibility.

Jerome Powell won an award just last week for going above and beyond to, as Warsh put it 16 years ago, “demonstrate” that he’s “worthy of this moment,” where that means remaining a “steadfast protector of institution[al] credibility” even under threat of criminal indictment.

Now, Warsh is taking the reins from Powell at a time when headline inflation’s 4% and the institution’s facing overt pressure from a White House where the man who helped plan both the legal assault on Powell and the attempt to oust Lisa Cook from the Fed board has just been named interim director of national intelligence.

I suppose that means we can expect, from Warsh, a “strong and forceful rebuke” of any and all attempts by The White House to influence policy at next month’s FOMC meeting and beyond.