I’ve suggested again and again over the past week or two that the fate of the newly-minted “bull market” (and I think it’s advisable to keep the scare quotes on for now) depends in no small part on the extent to which discretionary investors are still under-positioned.
Systematics did a lot of the heavy lifting earlier this year, but discretionary cohorts recently increased their own exposure to an equity rally some were clearly in danger of missing. If there’s more catching up to do, that’s good news for bulls.
There’s no perfect way to answer the question implicit in the above. There are proxies of various sorts, and anecdotal evidence aplenty. BofA’s monthly fund manager survey is an example of the latter, and as noted in FOMO > FOMC+, it does indeed appear that asset allocators are underweight stocks. The discrepancy with suddenly enthusiastic individual investor sentiment is stark.
The simple figure below shows monthly performance for Bloomberg’s Equity Long/Short Hedge Fund Index with both the MSCI All-Country World Index and relative tech performance using MSCI’s measure.
Long story short (no pun intended), Bloomberg’s index suggests returns have been flat since February (the black line in the figure). For JPMorgan’s Nikolaos Panigirtzoglou, that means the hedge fund universe most engaged with equities wasn’t engaged enough.
“This reinforces the idea that Equity Long/Short hedge funds are underweight,” Panigirtzoglou said, calling underperformance in March and May “striking given the strong performance of tech-related equities over that period.”
By contrast, JPMorgan said retail investors continue to show interest in the rally. The bank tracks small traders’ call option flows, which jumped sharply this month and last.
“This points to a re-emergence during May and June of the US retail impulse by the younger cohorts of retail investors that tend to prefer tech and tend to invest in the equity market via individual stocks or options on individual stocks,” Panigirtzoglou went on to say.
Obviously, this isn’t meant as a definitive assessment. To reiterate: There’s no one “right” way to determine precisely who’s on board and who’s still watching from the platform, scared to catch a train that looks to be at risk of derailing at high speed.
About all we can say for sure is that systematics have done their part+ and where there’s FOMO, there’s retail participation. The big question is whether, and to what extent, FOCUS — “Fear Of Cash Underperforming Stocks” — gets the best of reluctant professionals and asset allocators who haven’t yet traded last year’s defensive mentality for an offensive mindset.
