The stock market will continue higher until these 2 things happen, Bank of America says

• The stock market should continue to rise as investor positioning continues to be subdued, according to Bank of America.
• The bank highlighted that while active managers are saying they're bullish on stocks in surveys, their portfolios don't reflect that view.
• Stocks could extend their current bull market until these two things happen, according to BofA.

Hedge funds are saying one thing, but doing another, and that suggests to Bank of America's Savita Subramanian there is more upside to be had in the stock market until two things happen.

In a Friday note, she highlighted that investor sentiment surveys have shown a noticeable uptick in bullish responses over the past few months as the stock market moved higher. But portfolio positioning data of active investment managers didn't reflect the increase in bullishness.

"Investor surveys suggests less bearishness around risk assets, economic growth and equity returns from here. But holdings data of hedge funds and long only funds still betray deeply conservative biases," Subramanian said.

For example, the most recent Fund Manager Survey from the bank showed utility stocks as the least overweight sector, but hedge fund holdings data show a 20% net long position in utilities, which is a near record.

"The BofA Fund Manager Survey and our institutional Factor Survey are at odds with the latest holdings (and have been for a while)," Subramanian said. "Fund Manger Survey: getting warmer. Holdings: still ultra-defensive... Despite fading recession concerns, active equity exposure to cyclical vs. defensive sectors and high beta stocks remains well below average."

Subramanian said the bearish positioning among hedge funds comes at a time when investors should be playing more offense than defense in the stock market. That means the 5% sell-off in stocks this month is likely a buying opportunity.

Subramanian said investors should stick with cyclical stocks, referring to companies that follow economic cycles pretty closely, like consumer discretionary and technology stocks, and are not defensively positioned for a recession, like health care and utility stocks.

But her bullish outlook for stocks could fall apart pretty quickly if two things happen:

One is if hedge funds do what they say they're doing and significantly increase their exposure towards cyclical and high-beta stocks and away from defensive assets.

Such bullish shifts can be seen as contrarian indicators that signal weakness ahead.

Two is if the macro economy deteriorates considerably "to the point that the current defensive, low beta bias of fund managers is warranted," Subramanian said.

"Until some combination of the two things happen, the pain trade is higher in cyclical sectors and higher beta stocks, in our view. Today's macro data including the most recent global earnings revision ratio and our US regime model tell us that now is the time for offense, not defense," Subramanian said.