How to play the stock market bubble risk? Buy crypto and China, BofA says

Markets witnessed significant capital flows into various asset classes over the past week, according to the data compiled by Bank of America (NYSE:BAC).

Stocks attracted $29.4 billion, bonds $10.3 billion, cryptocurrencies $1.1 billion, and gold $0.3 billion. Meanwhile, $2.9 billion was withdrawn from cash holdings.

Cryptocurrencies have experienced the largest cumulative eight-week inflow on record, totaling $13.5 billion. This accounts for 30% of the total $45 billion inflow into the asset class since 2019, according to BofA's Michael Hartnett.

Bank loan funds also saw continued interest, with inflows over the past eight weeks, including $1.5 billion last week alone, marking the largest four-week inflow since February 2022.

US equities attracted a substantial $36.1 billion, driving the largest four-week inflow on record at $141 billion. Comparatively, the past seven weeks have seen a stark contrast in capital movements between US markets and the rest of the world, with the US receiving $176 billion in inflows while the rest of the world faced a $19 billion outflow.

The financial sector experienced its largest four-week inflow since January 2022, receiving $8.0 billion over the past month. Utilities, after five weeks of outflows, finally saw an inflow of $0.4 billion, the largest in the past 11 weeks.

The Bank of America Bull&Bear Indicator has decreased from 5.4 to 4.7, hitting an 11-month low. This drop, the largest weekly decrease since March 2023, reflects outflows from stocks and debt, poor stock market breadth, and increased cash levels.

The decline in this indicator, which represents a broad measure of global sentiment and positioning, from 7 to 5 over the past six weeks, highlights a significant disconnect between bullish sentiment on US assets and bearishness on assets from the rest of the world.

Bank of America's private clients, with a record high of $3.9 trillion assets under management, are currently allocated 63.3% in stocks—a 30-month high—and 19.0% in bonds—a 27-month low.

These clients are on track for the largest three-month equity outflow since the second quarter of 2023, while concurrently increasing their bond holdings through Treasury notes, marking the 10th largest inflow in the past 12 years.

"We forecast contrarian outperformance of Bonds, International stocks, Gold vs US exceptionalism consensus," Hartnett wrote in a note.

He recommended a strategy that includes positioning for a US economic boom and a global downturn in the first quarter, purchasing international stocks in the second quarter in anticipation of policy changes and easing financial conditions overseas, and investing in gold and commodities in 2025 for potential inflation surprises.

Finally, the bank suggests long positions in cryptocurrencies and China as hedges against potential "bubble" risks.