Bank of America’s Michael Hartnett says the ‘sell signal’ that preceded the tech selloff has ended, but investors should stay defensive until chip prices confirm a rebound.
TREE NEWS reports: The Bank of America Bull & Bear Indicator, a widely followed sentiment gauge, has fallen to 7.4 from 8.1, dropping below the 8.0 threshold that triggered a sell signal on May 26. While the sell signal is now over, Hartnett cautions that this does not constitute a buy signal. In his latest Flow Show report, he maintains a tactically defensive stance and outlines two preconditions for re-entering risk assets: a Federal Reserve rate hike on October 28 to restore credibility, and an easing of AI financing concerns. Neither has materialized.
Market expectations for an October rate hike have collapsed from over 50% to just 14%. Meanwhile, the AI credit market just suffered its worst week of the year: CoreWeave bonds have fallen into distressed territory, with its 5-year CDS spread implying a roughly 63% default probability. The Nasdaq 100 fell nearly 6% last week, its worst performance since ‘Liberation Day.’ Hartnett warns that if semiconductor prices decline, it would signal further tightening in AI credit and peak capex growth, shifting 2027 market returns from capital appreciation to income-driven.
Sell Signal Ends, But Buy Signal Still Elusive
The Bull & Bear Indicator dropped 0.7 points this week to 7.4, driven by deteriorating global equity breadth, hedge funds holding short positions in crude oil and S&P 500 futures, reduced gold futures longs, and weaker inflows into high-yield and emerging market debt. The only offsetting factor was continued net inflows into tech stocks. Hartnett also notes that the ‘old’ version of the indicator fell to 5.1 from 5.6, below its recent high of 8.0 on September 1. Both versions send the same message: the summer’s extreme optimism is over.
However, sentiment cooling does not mean capital is leaving. BofA’s breadth rule shows that a net 52% of global equity indices are oversold (below 50- and 200-day moving averages), the highest since April 2025. But triggering a contrarian buy signal requires a net 88% oversold reading. Hartnett believes that unless the still-overbought US, Taiwan, and Brazil markets fall another 6-10%, this threshold is unlikely to be reached soon.
Positioning Remains Crowded; Tech Overweight Highest in Five Years
Despite cooling sentiment, positioning remains highly concentrated. EPFR data for the week through Wednesday shows equity funds attracted $64.4 billion in net inflows, bond funds $11.8 billion, while cash saw $53.1 billion in outflows—the tech selloff left little trace in flow data. BofA private clients now hold a record 66.4% of assets in stocks, with cash at a historic low of 9.3%. For the year, global equity fund inflows are annualizing at $1.3 trillion, with tech funds at $196 billion—more than 2.5 times the previous record. The October BofA Fund Manager Survey shows tech overweight positioning at its highest since August 2020.
Korea presents the starkest divergence between positioning and price: the KOSPI has fallen 30% from its June high, but after the August peak, only $7 has been withdrawn for every $100 that flowed in. Hartnett notes that foreign investors were the main sellers this week, and with the buyback window closing, the real exodus may not have begun.
AI Financing Cracks Widen; Real Yields Near Warning Levels
Hartnett’s defensive stance rests on three pillars. First, the US 10-year real yield is near 3%, a level historically associated with major risk events like the dot-com bust, the global financial crisis, and the SVB collapse. Second, private equity ETF (PSP) and business development company ETF (BIZD) have both fallen to lows last seen in the first half of 2026. Third, Oracle’s 5-year CDS has surged almost vertically while overall investment-grade tech spreads remain flat, indicating the most leveraged borrowers are under the greatest pressure.
Goldman Sachs rates strategist David Curtin notes that AI infrastructure financing costs are a major source of market stress—for sub-investment-grade borrowers, all-in financing costs of 6-8% ‘bite faster’ in a high-rate environment. Goldman data shows CoreWeave’s 2031 bonds have traded at spreads exceeding 1,100 basis points over Treasuries. Consensus expectations for hyperscaler capex are $807 billion in 2026 and $1.16 trillion in 2027, while free cash flow is expected to turn negative at $63 billion this year and widen to -$163 billion next year. Goldman data also shows the semiconductor producer price index has jumped sharply after nearly three decades of decline.
Chip Prices: The Key Variable for 2027
Hartnett’s most critical forward-looking call: semiconductor price trends will dominate the macro and market landscape into 2027. If chip prices continue to rise, it would signal the US-China AI arms race persists, implicit government support for bond and equity prices remains, and investors will return to tech in mid-November, reversing ‘short tech, long bonds’ positioning into 2027. Conversely, if semiconductor prices fall, it would signal tighter AI credit, peak AI capex growth, and erosion of the nominal GDP boom—US nominal GDP has grown 63% to $33 trillion from the pandemic low, with soaring chip prices a key driver. In that scenario, bonds would likely outperform, and any asset priced on the AI capex narrative would face significant pressure, with 2027 returns shifting from capital appreciation to income.
Tactical Defense: Positioning for ‘Peaking Yields’
Hartnett is adding exposure to ‘peaking yield’ beneficiaries, including small caps, REITs, and consumer discretionary—the most underweight sector since July 2008 according to the October survey. He explicitly avoids adding to tech. Longer-term, he maintains overweight positions in gold, commodities, and emerging markets, while advising gradual reduction of long-term ‘short bonds’ and underweight China positions—a notable shift in his stance. He also points out via ‘price signals’ that 355 S&P 500 constituents are more than 10% below their 52-week highs, 188 are down over 20%, and 93 are down over 30%. Beneath the calm index surface, individual stock damage is substantial, potentially offering value for patient investors.
Key Takeaways for Investors
- The end of a sell signal is not a buy signal; wait for confirmation from chip prices and credit markets.
- Tech positioning remains extremely crowded; a real unwind may not have started yet.
- Watch semiconductor prices as a leading indicator for AI capex and broader market direction into 2027.
- Consider diversifying into ‘peaking yield’ beneficiaries like small caps, REITs, and consumer discretionary.
- Maintain strategic allocations to gold, commodities, and emerging markets while reducing long-term bond shorts and China underweights.
