A stock-market trading indicator that had been flashing "sell" since May no longer is as pessimistic toward stocks.

Bank of America's "Bull & Bear Indicator" - a 0-to-10 gauge based on a blend of factors including hedge-fund positioning, flows to the stock and bond markets, and stock-market breadth - fell to 7.4 from 8.1. That means that investors are more bullish than not, but they're not so ebullient that it warrants contrarian positions.

A snapshot of the “Bull & Bear Indicator.” BAML RESEARCH

The S&P 500 SPX advanced during this "sell" period - climbing about 3%. During 16 previous "sell" periods since 2002, it fell on average by 3% over two months.

Despite falling out of the "sell" zone below the 8 level, the firm's chief investment strategist advises staying in risk-off mode for several weeks until the next Fed meeting and the midterm elections have been negotiated.

A snapshot of the "Bull & Bear Indicator."

The decline in the gauge illustrates that the summer of the extreme bull has ended but, as Michael Hartnett's weekly "Flow Show" notes, asset allocators are not underweight risk.

The fund-manager survey conducted this week showed respondents were still holding very low levels of cash at just 3.9% of their portfolios, and 2026 has been a record year for inflows to tech stocks XLK.

A record year* for tech-stock inflows. * 2026 FLOWS ARE ANNUALIZED. SOURCES: BOFA GLOBAL INVESTMENT STRATEGY/EPFR.

Another reason for caution: Hartnett is concerned about the market's potential reaction to a sweep by the Democratic Party of both chambers of Congress in the midterm elections.

Joining other commentators this week, Hartnett and his team of Jessica Guo, Anya Shelekhin and Myung-Jee Jung believe that the decline in bond yields this month should lead to an improvement of equity breadth in the year's final quarter. The number of stocks trading 10%, 20% and 30% below their 52-week highs is, respectively, 355, 188 and 93, demonstrating just how narrow the S&P's SPX performance has been.

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As a result of the decline in 10-year bond yields this week, Hartnett and team highlight "peak yield" beneficiaries include real-estate stocks VNQ, small caps RUT and the consumer-discretionary sector XLY. While tech stocks should also benefit from lower rates, the fund-manager survey indicates overweight positioning, and fears of an AI bubble in 2027 is now the consensus view among fund managers.

As for Bank of America's longer-term recommendations, Hartnett sticks with bets on gold, commodities and emerging markets EEM and urges investors to reduce shorts in bonds TLT and Chinese equities.

What would provide impetus for that adjustment in bonds is a rate hike from Kevin Warsh and company on Oct. 28. Bank of America's economists think this would lend the Fed credibility - especially given that inflation has been above the long-term target for more than five years - and probably lop 20 basis points off bond yields.

The market is not expecting such an increase, however.