MW Markets are finely poised between a bullish breakout and bearish breakdown, says Bank of America strategist.

By Jules Rimmer

Lean in close, and you can hear markets "whispering big breakout or breakdown for risk assets coming soon."

That's according to Bank of America strategist Michael Hartnett, who has laid out the three "Bs" that will best indicate direction those perceived riskier assets, of which stocks are included, will take, in a Friday note to clients.

Those are brokerage stocks XBD, bank stocks IXG and bitcoin (BTCUSD), and double tops forming in the charts of these risk leaders, he warns, would be very bearish, while clean, upside breaks would represent a very bullish signal. A double top is a bearish, trend reversal signal - when a chart peaks at the same level twice and fails to break out to higher levels.

Hartnett's advice for bulls is to go long the Magnificent 7 tech stocks and rest-of-the-world value stocks with a barbell approach - portfolios that include balance the extremes of high and low-risk instruments. For bears, he recommends defensives like healthcare, staples and utilities whose combined weighting in the S&P 500 SPX is at a 25-year low.

The strategist also senses the markets are whispering that the dollar is in a bear market, because even 'peak tariffs' have failed to boost the dollar index DXY back above 100.

This may be explained by the Trump administration's often-expressed conviction that a weaker dollar can make American manufacturing great again, and also by the perceived threat to Fed independence as Trump's pressure on Powell is interpreted. This dollar infirmity would suggest a constructive approach on gold, emerging markets and international stocks more generally, he said.

The flow of funds data themselves, for the week ending on the 28th May, show a big swing of $19.3 billion into bonds, coinciding with UST30-year yields BX:TMUBMUSD30Y dipping back below the 5% mark, and also notably, $2.6 billion flooding into crypto as Donald Trump's media group announced plans to invest $2.5 billion in bitcoin.

Hartnett's overall strategy is still best encapsulated in his acronym BIG (standing for bonds, international and gold XAU) and he has a marked preference for long bonds yielding 5% over the S&P 500 index at 6000 levels.

He details how so far in the 2020s, overseas investors have bought roughly $350 billion of U.S. equities and continue to add to those positions, (annualizing at $138 billion for 2025). Whereas over the same period, they purchased $200 billion of U.S. Treasurys and corporate bonds, but those inflows have dried up to zero this year.

The chief risk Hartnett identifies at this moment is that U.S. policymakers try to inflate the bubble further by lowering tariffs, rates and taxes simultaneously in a "doomed" attempt to stabilize debt/ GDP ratios. This would incentivize an even more pronounced exodus from U.S. Treasurys.

-Jules Rimmer

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May 30, 2025 11:01 ET (15:01 GMT)

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