Optimal "AI Bubble Trading": Going Long on Both "Pride" and "Prejudice"

The optimal investment strategy in the current AI bubble environment is to simultaneously go long on "hubris" (leading AI technology companies) and "humiliation" (marginalized assets overlooked by the market), in order to capture bidirectional returns during the final peak phase of nominal GDP bubble. According to reports from Wind trading platform, Bank of America Securities chief strategist Michael Hartnett stated in a recent research report that the Bank of America Bull & Bear Indicator slightly retreated from 9.7 to 9.3, still remaining in an extreme bullish range, and continues to signal a "sell." Meanwhile, over the past week, funds showed structural differentiation: technology stocks experienced their largest single-week outflow in seven weeks, gold saw its biggest single-week inflow since January this year, commodities had a year-to-date return of up to 58.9%, while Bitcoin's year-to-date decline approached 28%. Bank of America pointed out that the core logic of current major asset allocation remains to avoid bonds, avoid the dollar, and be fully invested in AI, further reinforced by policymakers viewing the stock market as "too big to fail." However, strategists also warned that three potential constraints could suppress the continued upward movement of the bull market: soaring bond yields, shifting investor sentiment towards caution, and positions generally leaning towards the long side. "Hubris" plus "humiliation": Optimal dual-leg strategy for the AI bubble. Bank of America's core trading logic on AI themes stems from comparisons with historical bubble patterns. The report notes that the optimal bubble trading strategy is to go long on "hubris"i.e., AI technology itselfand also go long on "humiliation"i.e., drastically oversold cyclical assets that have long been neglected by the market and may be rebounded during the final peak phase of nominal GDP. Historical examples cited in the report include emerging markets during the internet boom in 1999 and subprime mortgages during 2007-2008, both playing a role as "beneficiaries of spillover effects" just before the leading bubble peaked. Bank of America believes that consumer sector assets are most likely to replicate this path in the current environment. At the same time, Bank of America recommends shorting AI bondsthe rationale being that the over $1 trillion in capital spending coupled with negative net cash flow means that the pressure from large-scale bond issuance cannot be ignored. The Bull & Bear Indicator is still in an extreme zone, but the effectiveness of the sell signal is limited. This week, the Bank of America Bull & Bear Indicator fell slightly from 9.7 to 9.3, maintaining a sell signal, triggered by weak inflows into high-yield bonds and net outflows in technology and healthcare sectors. The report points out that since the sell signal was issued on May 26 of this year, the S&P 500 index has cumulatively risen 4%, and the MSCI global index rose 3%, despite a maximum drawdown of 5% during that period (interrupted by interventions in the USD/JPY exchange rate and strong earnings from the tech giants). Bank of America highlights that excessive concentration in positions can disrupt the rhythm of the bull market, but the true end of the bull market requires a resonance of three factors: excessive positions, overly optimistic earnings expectations, and tightening policies. Currently, these three factors are not simultaneously present. Historical data shows that since the establishment of the Bull & Bear Indicator, 17 sell signals have been issued, and the global stock market has typically fallen 2% to 3% within the following 2 to 3 months, with an accuracy rate around 60%, and maximum drawdown between 15% and 20%. Fund flows: Gold and commodities are favored, while tech stocks are sold off. This week's fund flow data shows clear structural differentiation. Gold funds recorded a net inflow of $6.3 billion, the largest weekly scale since January; commodities have a total year-to-date return rate of up to 58.9%, ranking first among all asset classes, with oil prices up 43% this year. In contrast, technology funds experienced a net outflow of $1.2 billion, the largest single-week outflow in seven weeks. Meanwhile, European stock funds received a net inflow of $1.2 billion, the largest since February this year; Korean stock funds have recorded net inflows for the seventh consecutive week. In fixed income, investment-grade bonds saw an inflow of $10.6 billion, the largest in five weeks; emerging market bonds saw inflows of $1.4 billion, the largest in seven weeks. Cash-like assets attracted $25.4 billion in a single week. Bank of America private clients: Stock positions reach all-time highs, cash declines to the lowest. Data from Bank of America private clients reveal that assets under management have reached $4.7 trillion, with stock allocation rising to 66.4%, the highest level on record; bond allocation has fallen to 17.0%, the lowest since March 2022; cash allocation has dropped to 9.4%, the lowest level ever recorded. The net inflow for stocks in a single week is the largest since September 2022. Within bonds, private clients are slightly extending duration, increasing their allocation to 2 to 10-year U.S. Treasuries by 15% this year, while allocations to treasury bills with maturities of less than one year have declined by over 30% since last November, showing a continued lack of interest in 30-year long bonds. Over the past four weeks, private clients have bought into ETFs for Japanese municipal bonds and inflation-protected securities while reducing holdings in emerging market debt, utilities, and financial sector ETFs. Debt pressure is high, U.S. Treasury yields become the biggest variable. Bank of America warns that U.S. national debt is about to exceed $40 trillion, and is expected to reach $50 trillion by July 2029. Over the past 12 months, the federal governments debt repayment costs have reached $1.4 trillion, and these costs will keep rising until the yield on 5-year U.S. Treasuries falls below 3.25%. At the same time, the 30-year U.S. Treasury was issued at a yield of 5.126%, the highest in 25 years, while U.S. stocks simultaneously reached historic highs, underscoring the continued validity of the "avoid bonds" allocation logic. Bank of America notes that despite an overall rise in yields by 2026, long-duration and previously overlooked assets like REITs, small-cap stocks, biotechnology (XBI), and regional banks (KRE) are quietly outperforming the broader market, reflecting the market's anticipation of "yield peaking." The report suggests that the intervention in the USD/JPY exchange rate has sent a clear signal that the U.S. government does not want the yield on 10-year Treasuries to exceed 5%. Strategists anticipate that core CPI will decline to a range of 2.1% to 2.6% before the midterm elections, and hawkish Federal Reserve Chairman Warsh is expected to declare "mission accomplished" during his Jackson Hole address and the September FOMC meeting, in conjunction with the Bank of Japan's interest rate hikes, to jointly lock in the upward yield space. Hong Kong real estate and gold: Two trading paths to "avoid the dollar." Under the theme of "avoiding the dollar," Bank of America recommends two specific trading paths. The first is to go long on gold, viewing it as the best hedge against dollar depreciation, a collapse in the bond market, and asset inflation. The inflow of funds into gold this week also validates this market consensus. The second is to go long on the Hong Kong real estate sector. Bank of America strategists summarize this logic as "buy humiliation, sell hubris": the current level of the Hang Seng Property Index is on par with 30 years ago, with a valuation of only about 12 times earnings. The report believes that Asia is entering the third long-term bull market of the past 40 years, driven by technology in Japan and Korea alongside AI in China. Hong Kong also benefits from the relative decline in attractiveness of Dubai (geopolitical conflicts) and Singapore (taxation). November Midterm Elections: A political variable determining the continuation of the AI bull market. Bank of America lists the November 3 U.S. midterm elections as one of the most critical events influencing market direction. The report notes that if the Republicans maintain control of the Senate and Texas Governor Abbott successfully secures re-election, it is expected that risk assets led by the AI sector will accelerate their peak by 2027. However, if the Democrats win the Senate or the Texas governorship in November, the stock market, dollar, and bond yields could all experience a significant decline of over 10% before the end of the year. The Texas gubernatorial election is seen as a referendum on "affordability" versus "AI data centers": the state currently has 335 data centers, with another 247 planned for construction. Abbott recently announced a temporary suspension of data center expansions, reflecting voters' concerns about energy grid stability and living costs. Additionally, key dates that Bank of America is closely monitoring include Warsh's Jackson Hole speech on August 28, the Fed's FOMC meeting on September 16 (current rate hike probability 35%), and the Bank of Japan meeting on September 18 (rate hike probability 74%). This article is reproduced from "Wall Street Insight," author: Zhang Yaqi; GMTEight editor: Yan Wencai.