1. Bank of America says the stock market is flashing a 'sell' signal.

Bank of America signals a potential “sell” moment for risk assets, with cash levels falling to a three-year low and investor sentiment turning sharply bullish.

The report notes that the average cash allocation among fund managers has dropped to 3.9% of assets under management (AUM), triggering BofA’s “FMS Cash Rule” contrarian indicator.

According to the rule, cash allocations at or below 4% historically indicate a “sell signal” for global equities. December marks the second such trigger in three months.

BofA strategists highlight that previous instances of cash levels this low, such as in early 2002 and February 2011, coincided with significant market tops.

2. “We need to see stronger economic tailwinds for Small Caps to outperform,” said the head of US equity strategy research at RBC Capital Markets.

The Federal Reserve on Wednesday is expected to announce a quarter-point rate cut.

That move can finally help small-caps break out and clear the hurdles for the index to close at a fresh record for the first time since 2021.

“Small Cap stocks head into 2025 having completed their long climb back to their 2021 all time high, with arguably their best prospects since the peak of their Pandemic era outperformance,” said Julian Emanuel, chief equity and quantitative strategist at Evercore ISI.

3. Luxury sector breaking out of bearish trend.

The recent bounce in luxury stocks is hinting that some investors are ready to step in after a dismal year characterized by concerns over weakening demand in China.

Optimism is returning following numerous rounds of Chinese stimulus to rejuvenate the world’s second-biggest economy, which have put shares in makers of high-end goods on course for their best month since February.

These green shoots highlight investor sensitivity to China — whose consumers account for nearly 15% of the global luxury market. Another expected boon for luxury demand next year could come from the US, where Donald Trump’s plans to deregulate the economy and reduce taxes may provide a boost to spending.

A Goldman Sachs basket tracking the sector is even up 12% since a bottom in November, trimming its year-to-date drop to only 1%.

4. But not all animals are crated equal on the luxury farm.

“I definitely wouldn’t be buying luxury as a whole,” said Marcel Stotzel, a portfolio manager at Fidelity International. Stotzel sees 2025 as a “transitional year” for the industry, so it’s important to be selective.

The stocks of Gucci-owner Kering, Salvatore Ferragamo, Burberry and Hugo Boss are all down more than 30%.

In contrast, some of those catering to the wealthiest clients, like Hermes and Cucinelli, have seen valuations surge nearly 20%.

Even LVMH, which shares have slumped 14% in 2024 to date, is on track for its worst annual performance since the global financial crisis in 2008. The stock now trades at 22 times its 12-month forward price-to-earnings, below an average of about 25 times since 2018.

Such a slump makes even strategists like Bank of America’s Sebastian Raedler bullish as they are now “over-discounting global growth concerns,” he says.

5. “The market feels toppy,” says the Wall Street Journal.

“There are a bunch of things that make us think trouble might be imminent for stocks—perhaps a correction, perhaps the start of something bigger, but at least a bump in the road.

• Bulls are everywhere, and bears are hard to find.

• Other signs of optimism abound. For instance, households have never been so confident that stocks will rise over the next year, a Conference Board survey shows.

• Many think this time will be different, and almost everyone agrees artificial intelligence and the U.S. economy are great.

• No one cares about valuation, even though price is the starting point for future returns.

• Inside trades. The one group not buying into the story are corporate executives, who ought to be best-placed to see the potential for a new golden era for American profits.

None of these points are proof that the market must fall, let alone that it will happen soon. But I don’t want to be part of a crowd buying into a narrow story when prices, valuations and hope are already extremely high, and insiders aren’t willing to back it with their money.

This feels like a good time to take some money off the table.”

6. Is the US stock market weak under the surface?

When market breadth is weak, it means that the index can remain at record highs but with more decliners than advancers.

The megacaps are holding the index up but about 320 stocks closed lower, while only 182 finished higher.

This trend has persisted for some time. As a matter of fact, breadth has been negative for 12 consecutive days, the first time since 2001.

Very soon there’s likely to be an “all-or-nothing” day where nearly all 500 stocks fall a lot except for the mega-caps.

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