Bank of America Hartnett warns: Global stock markets are trapped in an "overbought" dilemma, with technical indicators reaching historic sell signals
Michael Hartnett warned that up to 89% of MSCI index constituents are simultaneously above two key moving averages, breaking through the historical sell threshold of 88%. Meanwhile, there is a significant divergence in the market, with global equity funds experiencing a net outflow of $15.4 billion in a single week, indicating that funds are withdrawing at high levels, yet market sentiment indicators remain "extremely bullish" due to the broad rise in stock indices
Bank of America strategists have issued a clear warning, believing that the global stock market has entered a dangerous "overbought" state.
On January 30, a team led by Michael Hartnett pointed out that although major global indices are still hitting historical highs, a key internal indicator has reached a threshold that suggests a potential reversal. Data monitored by the team shows that as of the week ending January 28, as much as 89% of the MSCI Global Stock Index constituents were trading above both their 50-day and 200-day moving averages. This ratio has surpassed the 88% "sell signal" historical threshold set by the bank's model.
Past experience indicates that when this indicator breaks this level, it typically means that market breadth is excessively expanded, significantly increasing the risk of a technical pullback in the short term. This serves as a warning bell for the currently hot market.
Divergence Between Technical and Fund Flows Intensifies
In stark contrast to the continuous new highs in stock indices, cautious signals have emerged within the market. In the week ending January 28, global equity funds recorded a net outflow of $15.4 billion, indicating that some funds are choosing to take profits at historical highs.
However, Bank of America's Bull & Bear Indicator remains in the "extremely bullish" range due to the broad rise in global stock indices and the robust performance of the credit market. This contradiction reveals a key market divergence: the technical indicators have shown overbought warnings, fund flows are beginning to retreat, but sentiment indicators remain in an extremely optimistic state.
This rare combination of technical, fund, and sentiment factors typically indicates that the underlying momentum of the market is quietly changing, and the apparent strength may mask vulnerabilities, further highlighting the potential pullback risks accumulated after repeated new highs.
Regional Market Fund Flows Diverge
U.S. equity funds regained their attractiveness last week, recording a net inflow of $9.2 billion, indicating that U.S. assets still possess relative appeal amid an overall outflow of funds in the global market.
In contrast, fund flows in European stock markets have reversed, experiencing a net outflow of $400 million for the first time in seven weeks, marking a temporary interruption of the previously sustained inflow trend.
Bank of America strategist Michael Hartnett clearly stated that his most favored trading strategy for 2026 is to go long on bonds, international stocks, and gold simultaneously. This allocation continues the "preference for international stocks" stance that has been recommended since the end of 2024, a judgment that has been validated by the recent underperformance of the U.S. stock market compared to international markets
