Investor optimism has reached extreme levels, Bank of America strategists say, with their Bull & Bear Indicator rising to 9.4 from 9.2 — a threshold that continues to flash a sell signal for risk assets.

The uptick was driven by “strong global stock index breadth, long-only bull positioning, and robust credit market technicals,” strategists led by Michael Hartnett note, which together outweighed recent equity fund outflows.

Hartnett highlights that 89% of MSCI global stock indexes are now trading above both their 50-day and 200-day moving averages, pushing markets into what the bank classifies as “overbought” territory. The breadth rule’s 88% trigger level historically signals elevated downside risk for equities.

In the current backdrop, Hartnett reiterated several preferred positioning themes for 2026. He continues to favor long exposure to bonds as a hedge against disinflation and potential deleveraging, alongside a structural bullish stance on international assets, particularly China.

“Buy China to position for end of China deflation & potential political change,” he wrote in a note. 

Gold also remains a core allocation as a hedge against U.S. dollar debasement, while mid-cap stocks are viewed as beneficiaries of domestic economic momentum. On the other side, strategists remain bearish on the U.S. dollar and investment-grade tech credit.

Fund flows over the latest week underline a growing shift toward defensive and real asset exposure. Bond funds attracted $17 billion, money markets saw $10 billion of inflows and gold drew $6.7 billion — the largest weekly gold inflow since October.

Equity funds, in contrast, recorded $15.4 billion of outflows, while crypto products lost around $400 million.

By sector, Materials funds posted a record $11.8 billion inflow, while Energy saw its biggest inflow since October 2023 at $2.3 billion.

Regionally, China equity funds suffered a record $60.5 billion outflow for a second consecutive week, which BofA linked to likely “national team” selling.

U.S. equity inflows resumed at $9.2 billion, while Europe recorded its first weekly outflow in seven weeks and emerging markets extended their run of withdrawals.