Bank of America: Keep a close watch on two key levels; these will be the catalysts triggering a summer sell-off.

Bank of America Securities recently released its latest "The Flow Show" report, issuing a warning: market sentiment is currently in the extremely optimistic zone, and if two key technical levels are breached, they may become the fuse triggering a summer selloff of risk assets. Meanwhile, this week has seen multiple reversals in fund flows worthy of caution, and structural changes in the market are accelerating.

Michael Hartnett, Bank of America's Chief Investment Strategist, pointed out in the report that if the "Magnificent Seven" ETF (MAGS) falls below $60, or AUDJPY falls below 110, a truly meaningful summer "risk-off" event could be triggered. These two levels are regarded as the core supports for current market sentiment; if both are breached, the previously accumulated extreme long positions will face concentrated pressure to be closed.

This week’s fund flow data shows clear cracks: U.S. stocks saw their first net outflows in 13 weeks ($8.5 billion), the technology sector recorded a record $9.3 billion weekly net outflow, and the Bank of America Bull & Bear Indicator dropped slightly from 9.2 to 9.1, continuing to emit a "sell signal". According to Bank of America's data, since 2002, there have been 17 sell signals triggered, after which global equities fell on average 2% to 3% in the following 2-3 months, with maximum drawdowns reaching 15% to 20%.

Two Key Levels: MAGS and AUDJPY

Bank of America has listed the $60 level for the MAGS ETF (tracking the "Magnificent Seven" tech giants) and 110 for AUDJPY as core gauges of summer risk sentiment.

The MAGS ETF is one of the most concentrated vehicles for market bullish sentiment. The report points out that if this ETF falls below $60, it will mark a substantial shake-up in market confidence regarding ultra-large-cap AI tech stocks, possibly triggering broader risk asset selloffs.

AUDJPY is a classic proxy for global risk appetite. AUDJPY usually strengthens during global economic expansion and weakens when risk aversion rises. Bank of America noted that a break below 110 would be an important catalyst signal for "summer risk-off", and major historical market turmoil (such as in September 2001, October 2007, and 2008) have coincided with sharp declines in this rate.

Bull & Bear Indicator Continues to Emit Sell Signal

Bank of America’s Bull & Bear Indicator fell from 9.2 to 9.1 this week, but remains in the extremely optimistic zone (maximum score of 10), and the "sell signal" has been triggered since May 2026 and continues to this day.

Looking at the internal components, the Fund Manager Survey (FMS) positioning is at the 100th percentile, indicating "extremely bullish"; bond inflows are at the 81st percentile, also extremely bullish; equity inflows are at the 74th percentile, and credit market technicals at the 75th percentile. This week’s slight drop was mainly dragged by equity net outflows and widening spreads in high-yield/AT1 bonds.

Bank of America’s historical backtesting shows that after the 17 sell signals, global equities fell on average 2% to 3% in 2-3 months, with a hit rate of about 60%, and maximum drawdowns of 15% to 20% in extreme cases.

Multiple Reversal Signals in Fund Flows

This week’s global fund flow data shows clear structural changes, with several previously persistent trends seeing their first reversals.

Equities: U.S. stocks saw their first net outflow in 13 weeks, $8.5 billion out in a single week, after last week’s record $119.2 billion net inflow. Technology sector saw $9.3 billion net outflow in a single week, also a record, after last week's $19.2 billion net inflow. Government bonds saw their first net outflow in 9 weeks at $94 million.

Meanwhile, funds are flowing from tech giants to small/mid-cap stocks, REITs, and infrastructure sectors. This week, REITs saw their largest weekly net inflow since March 2024 ($900 million), infrastructure recorded a $1.5 billion net inflow—the highest in six weeks, while the energy sector faced its largest net outflow since April 2025 ($1.5 billion).

The bond market has recorded net inflows for 61 consecutive weeks, attracting $16.6 billion this week, with investment-grade, high-yield, and emerging market bonds all continuing to see inflows.

High Profit Margins Support Stock Market, But Risks Are Building

Bank of America notes that the current S&P 500 operating profit margin of 16% is the core foundation for the market’s continued "preference" for stocks, as high profit margins historically correlate highly with positive stock returns.

However, the report warns that liquidity flowing out of ultra-large-cap AI tech stocks is quickly being redirected to semiconductors, small/mid-cap stocks, residential, and REITs, a rotation interpreted as the market preemptively positioning for the expectation that Trump’s policy focus may shift toward "affordability".

Since the start of the year, among asset performances, commodities have led with a 32.7% rise, emerging market stocks up 24.5%, S&P 500 up 8%, gold down 8.1%, and Bitcoin down by as much as 30.5% year-to-date.

New Fed Chair Warsh: Contrarian Bets on Bonds

The report also reviewed the market performance since new Fed Chair Warsh took office. Since Warsh’s term began on May 22, 2026, U.S. Treasuries have risen 3.2% and the S&P 500 has fallen 1.6%.

Bank of America compares Warsh with the handful of Fed chairs in history whose terms coincided with falling bond yields, including Eccles, Volcker, Greenspan, and Bernanke. The report notes that although Warsh has been characterized by the market as "new hawkish", he has so far failed to persuade any investors to abandon the core strategy of "staying away from bonds". Bank of America believes that going long on long-term U.S. Treasuries remains the most contrarian long-term trade in today’s market.

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