Author: Rita
BofA's Bull & Bear indicator rose to 9.7, the highest level since 2021, just one step away from triggering a "sell" signal. Over the past week, $52.9 billion flowed into cash, $32.9 billion into stocks, and $23.1 billion into bonds. In its Flow Show report released on August 6th, BofA pointed out that policymakers have a clear intention to backstop financial conditions, a judgment validated by the coordinated FX intervention of the past week. BofA referred to this intervention as the "poor man's LTCM event," alluding to the Fed's backstop actions during the collapse of Long-Term Capital Management in 1998. However, the Bull & Bear indicator entering extreme territory, the continued widening of credit spreads for AI hyperscalers, and the gathering uncertainty around the midterm elections constitute the core contradictions in the current market. BofA's advice is "retreat or rotate"—exiting risk assets or rotating into defensive sectors, duration assets, and the US dollar.
Diverging Flows: Record Equity Inflows but Tech Sees First Outflow
Capital flows over the past week showed distinct divergence. Equity funds saw inflows of $32.9 billion, which, annualized, would amount to $652 billion for all of 2026, a record high. Bond funds attracted $23.1 billion, with investment-grade bonds seeing inflows for 18 consecutive weeks, annualizing to $527 billion, also a record. Cash funds received $53.7 billion. Precious metals saw inflows for five consecutive weeks, and cryptocurrencies attracted $600 million.
The technology sector experienced its first outflow in six weeks, amounting to $700 million. Semiconductor ETFs saw outflows of $2.4 billion, also the first in six weeks. However, tech fund inflows annualized at $217 billion still set a historical record. Infrastructure saw outflows of $300 million, the largest since March. Among private clients, with AUM of $4.5 trillion, equity allocation stands at 65.7%, bonds at 17.4%, and cash at 9.6%. Private clients are returning to T-bills (largest inflow since April) while selling T-notes and remain net buyers of stocks.
BofA's Bull & Bear indicator rose from 9.4 to 9.7, its highest since 2021, nearing a "sell" trigger. The increase was primarily driven by strong inflows to high-yield bonds, narrowing spreads for global high-yield and AT1 risk bonds, and improved breadth in global equity indices. BofA noted that the old Bull & Bear indicator reading was 7.8.
Strategic Judgment: Retreat or Rotate, Liquidity Backstop vs. Rising Political Risk
BofA's strategic judgment calls for a "summer retreat or rotate," not "re-adding risk." It advises withdrawing from risk assets or rotating into defensive sectors (consumer staples), duration assets (REITs, small-cap stocks, biotech), and the US dollar. These assets can hedge against the risk of tightening financial conditions and are defensive against the consensus expectations of "no macro hard landing, no Fed rate hikes, no AI capex cuts, and no Democratic midterm sweep."
BofA believes policymakers view the stock market as "too big to fail." The economy relies on the wealth effect (household stock holdings increased by $7 trillion this year, with a projected total increase of $9 trillion for 2024 and 2025 combined) and the AI data center capex boom. The logic for ending the bond bubble and boom still holds, but this ending requires a "higher yields-lower dollar" bond vigilante event to force a fiscal policy pivot and an asset allocation shift from stocks to bonds. "Rising yields, falling banks" would be the canary in the coal mine.
The coordinated FX intervention of the past week validates policymakers' willingness to backstop financial conditions. BofA considers Yield Curve Control a potential tool. If financial conditions tighten beyond expectations, policymakers might deploy this tool. Bond investors are currently the group with the strongest directional risk appetite.
Midterm Elections Are the Largest Macro Variable for the Second Half
BofA posits that 2020s political populism = fiscal excess = nominal GDP boom. US nominal GDP has risen from $20 trillion to $32 trillion over the past six years, a 63% increase. But the midterm elections are a referendum on populist capitalists. Republicans retaining Senate majority is a market-positive outcome. Analysis of Trump policy priority keywords on social media shows "Iran" and "Taxes" rising in rank for 2026, while "Border," "Energy," and "Economy" decline. BofA recommends going long consumer stocks, the best beneficiaries of Trump's pivot towards "affordability." Also, go long gold as a hedge against the possibility of K-shaped economy voters delivering an "It's the economy, stupid" verdict in the midterms, which could trigger a year-end decline in yields, the dollar, and stocks.
Credit spreads for AI hyperscalers continue to widen. BofA believes the Mag 7 index needs to return above 50 to eliminate the threat of "cheap Chinese computing ending the AI capex boom." Current EPS optimism is high, with 12-month forward EPS up 33%, benefiting from $35 billion in tariff rebates over the past three months, reversing the $75 billion EPS tariff shock from May to July 2025. Employment correlates positively with profits, making July's non-farm payroll data a key variable. Strong employment (NFP >125k, unemployment <4.1%) could see Warsh turn hawkish again at Jackson Hole on August 28th; weak employment (NFP 4.3%) would present a contrarian opportunity to go long duration and defensive assets. The midterm elections are reshaping the macro narrative. The liquidity backstop provides downside protection, but the Bull & Bear indicator rising to 9.7 suggests upside is largely priced in.
Disclaimer
This article is Tideflow Research's compilation and interpretation of a third-party brokerage research report (BofA Securities, August 6, 2026), combined with publicly available market information. The ratings, target prices, earnings forecasts, and related judgments cited herein are the views of the respective brokerage analysts, representing only the position of their affiliated institutions. They do not represent the views of Tideflow Research and do not constitute any investment advice.
The market carries risks; decisions should be made independently. This article should not be used as the basis for trading any securities.
