Flashing Red! Europe bullishness triggers 'sell' signal

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Fund managers have grown so bullish on European equities in the last month that a "contrarian" sell signal has been triggered, according to research by the Bank of America Merrill Lynch.

A total of 235 panelists with $643 billion of assets under management participated in a global survey for the BofA Merrill Lynch Global research report. When asked about equity allocation for Europe, a net 46 percent of asset allocators are overweight European equities, up from a net 36 percent September and representing the highest reading since 2007.

"The rise in allocation triggers a contrarian sell for EU stocks," a team of strategists led by European Investment Strategist John Bilton said in the BofA Merrill Lynch Fund Manager Survey for October.

(Read More: European equities looking cheap as recession eases)

Bilton added in press conference on Thursday that this is the first "potentially overbought" signal for a region since December 10, a time when emerging markets showed the same warning signals and sold-off around eight months later.

Continue to see buying of European equities: Strategist
Continue to see buying of European equities: Strategist   

Last Friday, Bank of America Merrill Lynch indicated just how large the flows have been into European equities. Michael Hartnett, chief investment strategist at the bank said in a research note that there have been 15 straight weeks of inflows to European equity funds, which is the longest streak in 11 years, he said.

(Read More: European Equities Have 'Rarely Been So Appealing')

"The signal warrants caution," Bilton said, but added that valuations are low with a net 28 percent of fund managers seeing Europe as cheap. Hilton is also not sure where investors will go if this contrarian indicator is followed, with a net 68 percent seeing U.S. stocks as expensive, a net 30 percent already overweight on Japanese stocks, and a net 38 percent seeing an unfavorable emerging market profit outlook.

The investment bank iterated that answers from the fund managers "inferred" that it might be a contrarian signal, and BoAML themselves still have a "constructive" view on European equities with a 2014 target of 3,300 points for the pan-European Stoxx 50 Index.

"(We're) not saying 'sell EU stocks' but for contrarians, EM/-EU might be interesting," Bilton told CNBC.

(Read More: Time to Switch Into European Equities?)

The same Euro Stoxx 50 regional benchmark has rallied 9.07 percent year-to-date with a current price-to-book ratio - which is used to compare a stock's value to its book value - of 1.41 percent from a ratio of same ratio of 1.29 percent back in August, with a lower ratio meaning the stock market could be undervalued.

The last time the euro zone climbed out of recession was in October 2009, when the price-to-book ratio for the pan-European Euro Stoxx 50 Index was at 1.5 percent. In contrast, the price-to-book ratio of the S&P 500 now stands at 2.44 percent from an average of 2.42 percent back in August.

CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81