Crash signals are getting louder for European stocks, says BofA — Here's why

A key Bank of America stock price indicator is flashing a warning sign that European equities could be at risk of a price crash in the coming weeks. The bank's European Momentum Conviction Indicator (MCI) — a key measure of the underlying strength of stocks' recent performance and future direction — has plunged to 17, BofA quant strategists said. That score is now well inside the critical danger zone threshold of below 30, they explained in a note Thursday, suggesting a sharp market reversal could now be in the cards. A 30-or-below reading on BofA's MCI typically points to a greater risk of a 12-month price momentum crash over the next 4-8 weeks. Paulina Strzelinska, BofA quant strategist, said the deepening price momentum crash signal is driven by all three of the indicator's inputs: implied volatility, momentum volatility, and trend reversal risk. Momentum is a key factor in quantitative trading, alongside other signals such as value and volatility, that machine-learning funds use to model their investment strategies and size positions in their portfolios. Strzelinska said the slide points "primarily to volatility‑driven regime‑shift risk", alongside some evidence of trend acceleration, "though not a full‑blown momentum bubble." .STOXX 1Y mountain Stoxx 600. Europe-focused equity funds saw more than $1.5 billion of outflows over the past week, their fifth consecutive week of withdrawals, BofA's analysis showed, reflecting growing investor aversion to the region. The warning comes as investors this week expressed fears over a possible equity market correction coming down the line. Neil Birrell, chief investment officer at Premier Miton Investor, highlighted the "diverging views" on the prevailing macro backdrop among bonds and equity markets, telling CNBC that it's only a matter of time before the r ecent bond market jitters spill over into stocks. — CNBC's Michael Bloom contributed to this report.