Chief Investment Strategist Michael Hartnett, a huge name over at Bank of America (NYSE:BAC | BAC Price Prediction), recently warned of a “sell signal” for global stocks. And it couldn’t have come at a more uneasy time for stocks, especially with all the volatility that’s going on behind the scenes of the S&P of late. The software stock meltdown got way worse on Tuesday’s session in response to Anthropic’s move into legal with some new disruptive AI tools.
Global markets are getting overbought. It might be time to rotate
Notably, global markets seem to be entering a period of historically “overbought” levels. With stocks across the globe running hot, well above their moving averages, while market sentiment skews a bit too greedy, and it certainly feels like a market correction is not only a long time coming, but a nice thing to have with all the froth that’s built up after a sensational 2025.
Could it be that investors were getting a tad too greedy going into 2026?
Possibly. As for how to play a potential 2026 sell-off, Hartnett still likes gold (the “debasement” trade still seems very much in play) despite the latest single-day correction suffered last Friday, when Trump picked Walsh to succeed Powell as Fed chair. Additionally, bonds, commodities, and international securities were highlighted as a way to play defense.
While corrections, sell-offs, and crashes (especially bubble bursts) can be very hard to time, I do think that there’s no questioning the enthusiasm in the markets going into 2026. Stocks were overbought, arguably overvalued, and January may very well be the new normal for investors. Indeed, extra volatility, bad days, and the odd panic (whether it’s gold or tech) are to be expected.
Volatility could get fierce as tech, Bitcoin, and even precious metals wobble
Undoubtedly, it was a pretty bad day to be a software company, especially one in the business of selling legal software. After another wave of selling that ravaged through the tech markets, the fear brought forth by the latest wave of AI-driven disruption is almost palpable. There’s no question that the pace of AI innovation might be a bit destabilizing, especially if you were inclined to act as a contrarian in the software scene.
It’s hard to be a holder of any software stock, and while it feels like stocks have already plunged into a bear market, the reality of the situation is that the S&P is incredibly close to its all-time highs. In fact, it’s within a single percentage point of hitting new highs.
Given the horrid session of selling in software, the “tough crowd” for the latest big-tech earnings season, heightened valuations, and, perhaps most frustratingly, a lack of momentum in some of the AI winners (think Nvidia (NASDAQ:NVDA)), and it feels like a great time to exit markets for a bit, at least until things feel a bit calmer or, at the very least, cheaper.
The market, as a whole, is still overbought and could be at risk of a sell-off similar to the one Hartnett cautions of. While prospective returns may be muted from here after an impressive 2025 of gains, I wouldn’t overreact at this juncture by selling out of stocks that have already taken a big hit. If you haven’t played defense, though, I’d argue buying gold on the pullback as well as bonds might not be a bad idea.
The bottom line
The worst that could happen is you’re caught holding safety assets in a continuation of the market rally. For now, it feels like sentiment is reversing course, with the Mag Seven managing to disappoint despite reporting decent results. In a market where clear AI winners, like Nvidia and Microsoft (NASDAQ:MSFT), can’t gain, while the AI losers (think some software firms) are nosediving, it feels like the path of least resistance is lower. For stock pickers, there might be more of a chance to pick up the winners and steer clear of the value traps.
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