Wednesday, January 17, 2018
Plenty of bulls
Sentiment and position presented in the monthly BAML survey gives us a glimpse into fund managers perspective on the global investing landscape. The viewpoints documented in the monthly survey gives us the ability to look at a potential contrarian outlook to shape trades against the herd. January's data has plenty of trends to observe and below we address the more notable takeaways.
January rotation shows a buying of cyclical plays and selling of defensive plays.
Net hedge fund equity market exposure jumps to 49% which is the highest since 2006.
A majority of investors now expect a peak in equity markets in 2019 or beyond, pushing back the timing by two quarters from December, when the majority expected a top in Q2 2018.
Investors overweight allocation to equities relative to overweight bonds highest since August 2014.
Allocation to equities jumped to 2-year highs of net 55% overweight. Current allocation is high at 1.1 stdev above its long-term average.
Allocation to US equities slips to net 17% underweight from net 15% underweight last month while allocation to Eurozone equities holds a net 45% overweight remaining elevated vs history.
In conclusion, the trend remains up as all US equity indices hit a new high yesterday. However, with the reversal off new highs on healthy volume after the current thrust higher over the last week, we expect volatility to pick up. Coupled with the excessive sentiment and the aggressive positioning in equities from managers we are watchful for any pending weakness. From a contrarian trade it seems as the herd is positioned for continued strength with little worry of the market peaking. Considering how fund managers are deploying their capital the biggest shock would be a market top in the first quarter and a real correction during 2018. We still believe the market is healthy and short term pullbacks should be expected. We view these potential pullbacks as opportunities and still favor US equities as they remain underweight versus their European counterparts.
Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.
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