Positioning isn’t necessarily your friend anymore if you’re a bull.
Equities benefited immensely in May and early June from what Morgan Stanley’s Mike Wilson this week described as a “180 degree” turn in investor sentiment. Long story short, the mood among discretionary investors — individual and institutional, retail and professional — improved as stocks ran away higher. In turn, discretionary positioning caught up to re-leveraging among systematic investors, whose exposure adds helped bolster stocks previously.
Headed into this week, market observers wondered if there were still pockets of discretionary under-positioning, and if so, whether they’d be squeezed, propelling stocks higher still. Although it’s impossible to answer the first question definitively, it’s probably fair to suggest a meaningful part of the so-called “catch up” dynamic has run its course, or at least in the very near-term.
Individual investor sentiment was off recent highs in the latest AAII survey, and professionals have taken up their exposure according to a variety of metrics, indicators and anecdotal evidence.
Goldman was pretty forthright about it. “Positioning is no longer a tailwind to equities,” the bank said, somewhat flatly, in a note discussed here Thursday.
In his latest, BofA’s Michael Hartnett underscored the point. “Sentiment is no longer ‘extreme bearish,'” he wrote, referencing the bank’s pseudo-famous Bull & Bear indicator. The indicative measure — which encapsulates hedge fund positioning, credit market technicals, equity market breadth, flows and long only positioning — hasn’t flashed a screaming “buy” signal since October’s lows, but it’s loitered consistently on the contrarian “buy” side of the neutral line. When taken with evidence of under-positioning elsewhere, the implication was that notwithstanding macro and policy headwinds, bulls at least had positioning on their side. That is: If sentiment turned, there’d be some catching up to do. And that’s exactly what happened last month and early this month.
Now, though, with discretionary investors joining their systematic counterparts on the “long” side of the neutral line, and with individual investors all-in (according to some accounts), the asymmetry which favored bulls in the event of a FOMO-driven squeeze is mostly gone.
Amid a flurry of global rate hikes, equities were on track for their largest weekly decline since March’s banking turmoil.
“BofA private client equity allocations are back above 60%” and with AAII bullishness near the highest since November 2021, sentiment is “no longer an unambiguously contrarian positive for stocks and credit,” Hartnett went on.
Note from the table below that a hodgepodge of BofA indicators are “neutral.” The only exception is a metric which flashes a “buy” signal when cash allocations are elevated.
Bulls can still point to the mountain of cash parked in money market funds (and related cash overweights among asset allocators) as evidence of additional scope for equity gains. Hartnett said as much himself.
Although sentiment isn’t a bull’s best friend anymore now that positioning is no longer amenable to a “contrarian indicator” interpretation, it’s “not an impediment to fresh upside” either, given elevated cash levels and the $5.4 trillion still sitting on the sidelines, he wrote.
So, where does that leave us? Well, in limbo for now. If you ask BofA, the S&P has “max” upside of 150 points compared to 300 points of max downside “between now and Labor Day.”
I don’t see the cash allocations as a potential tailwind for the market unless rates come down, but rates will only come down if there are other major issues in the market so it’s a bit of a catch-22 as an indicator right now. A 5% risk-free return right now is just too good to pass up and I’m now of the mind that this rally is likely exhausted and we either tread water or drop from here. I have no problem missing out on whatever upside there is for now and would prefer to wait for a ten percent pullback before dialing up my investment aggression levels.
I’d thought and loudly proclaimed that we’d see a good bid in equities, driven by window-dressing into qaurter/half-year end. Looked like a layup. Oopsie. I’ll give it another week, but this may be a warning flag when it comes to pent-up buying narratives, no?
Outside of pressure to “Make sure we show some Nvdia in our holdings and maybe a little more Apple.” That’s make easier because many holdings reports do not even seem to show the acquisition cost. So It’s a no-brainer to pay up. Career management 101.
“No one ever got fired for being long the S&P 500” as the saying goes.
Not all cash balances are the same. Over the past 3-4 years an entire generation retired, many well before they were planning. They then sold their homes at peak value cashing out and down sizing (purchasing or simply renting). They are sitting on their cash and earning 5%. They have no appetite for risk, I doubt they even care enough to have FOMO. When one retires it is one’s prerogative to check-out, de-stress and focus things other than the market.
Excellent point. Retired dry powder.
As I read this I have to reflect on the fact that one of the trusts I hold is 95% in fixed income funds, mutuals, ETFs, and CEFs. It was up for the week. I’m not sure exactly why but it seems backwards.
there is no compelling reason to sell. without sellers there can’t be a selloff. what i found amusing was the number of analysts who claimed the market was way overvalued, but then in the next sentence, said they are looking to buy a pullback. the best were the one’s talking about the extreme valuation on nvda, and how the company would need to grow sales by 50% per year compounded for x years to justify the valuation. and once again followed by looking to buy a dip. how can such commentary be taken seriously?