Some Alarming Contrarian Indicators

In our last post we stated that while the market remained in a sustained uptrend, we'd noticed some indicators that had started to flash caution signals.  Today, the Bank of America-Merrill Lynch monthly global fund manager survey (FMS) was released and it comes at the appropriate time as the market is experiencing its biggest down day of 2017.

There are some data points in the survey that serve as contrarian indicators and others that highlight potentially crowded trades.  To top it off, the S&P is currently breaking the uptrend line from the pre-election lows.  Are we finally getting the pullback that everyone has attempted to predict?  Lets get to the facts...

Below is the summary of the FMS survey straight from BAML:

"Bottom line: March FMS shows investor sentiment in a “bullish holding pattern”; cash can fund H1 upside but FMS Positioning & Profits argue for March/April risk rally “pause”; Policy the key catalyst for “Icarus trade” to fly higher in coming months."

These are some of more interesting data points from the FMS:

Crowded Trades:

• The 2 most crowded trades are long dollar and long banks
• The dollar has a potential bearish head and shoulders top while challenging the uptrend line from 2016 lows.  
• Banks via the KBE index are rolling over as they took out the Jan 2017 lows and are now negative on the year.

Rotation

•  Fund managers favor Emerging markets over US and more defensive sectors (utilities & staples) over more volatile sectors like energy.

Equities Overweight:

• Equity overweight is highest in almost 2 years
• However allocations to US equities dropped sharply to net 1% OW from net 13% OW last month.
• As we see above money has rotated to Eurozone as equities rise to 11 month highs to net 27% OW

Overvaluation

• While this measure can stay extended for long periods it is flashing contrarian readings favoring a pullback in the US dollar.
• The second chart confirms why fund managers are rotating into EM equities vs. US equities.

Summary

Fund mangers seem to be rotating into undervalued markets and defensive sectors.   The pullback today in financials flashed a perfect contrarian signal as it was the second most crowded trade.  The S&P 500 is having its first 1% down day since October 11th, 2016.  That represents 109 trading days since the last 1% drop.  This coincides with a break of the clearly defined uptrend from the election lows.  We have been raising cash the last few weeks because the evidence didn't suggest being too aggressive at current levels.  However, we maintain that this is a bull market and pullbacks after a sustained run are normal and should be looked at as buying opportunities.