A surprising bullish signal is flashing for mega-cap growth stocks even as big-money investors flee, BofA says

• Futures positioning of institutional asset managers is flashing a bullish signal for mega-cap growth stocks, according to Bank of America.
• Net long positions in the tech-heavy Nasdaq have fallen to the depths of the COVID-19 corrections, BofA said in a note on Tuesday.
• Conversely, a surge in net long positions for small cap stocks have flashed a bearish signal, BofA said.
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The underperformance of mega cap technology stocks amid a rising interest rate environment could be a buying opportunity for investors, according to a Tuesday note from Bank of America.

A surge in the 10-year US Treasury yield to a pre-pandemic high of 1.75%, coupled with investor anticipation of an economic reopening that will benefit cyclical stocks more tied to the physical economy, has led to significant outperformance of cyclical and small cap stocks relative to growth and large cap stocks.

But a contrarian bullish signal has just flashed for mega-cap tech stocks, while a bearish contrarian signal has flashed for small cap stocks, according to BofA.

The signal is based on the positioning of institutional asset managers hitting extremes in certain asset classes.

"Futures positioning suggests that institutional asset managers may be too bullish on the Russell 2000 e-mini and too bearish on the Nasdaq 100 e-mini," BofA said.

Positioning in the Russell 2000 have hit the most aggressive net long level since prior peaks seen in February 2020 and September 2018. The Russell would go onto sell-off significantly once hitting those levels. Meanwhile, net long positioning among asset managers in the Nasdaq have fallen to levels not seen since the depths of the COVID-19 correction in March 2020.

"We view this as contrarian bearish for small caps and contrarian bullish for mega cap growth," BofA said.

Net long futures positioning in the S&P 500 still remains "well below" the peaks from mid 2011, early 2018, and early 2020, which all preceded a deep correction in US stocks. This "is a market positive" and suggests there is more room to run for the S&P, according to BofA.