After the recent performance off the October lows many market participants are labeling this market euphoric. While we believe the market is extended, the evidence doesn't point to a euphoric market just yet. The most recent Bank of America (BAML) fund manager survey gives us a good glimpse into investors sentiment and positioning. Below are the key takeaways from the January survey.
While investors allocation to global equities has risen from net 12% underweight to net 32% overweight since August 2019, the biggest jump in equity positioning since 2011, but still below teh net 50% overweight level consistent with prior market tops.
Cash levels are still not supportive of a blow off top. There still remains cash on the sidelines that can be sucked into the markets.
Another signal that we are not at euphoric levels just yet.
The 2020 election in November will be the biggest macro theme throughout the year and why it is considered the biggest tail risk.
As we see below investors have positioned money into Europe and Emerging markets, favoring these regions over US equities.
The S&P remains extended and overbought. However, this market was overbought starting in November as the 14-day RSI has been consistently above 70 since then. A strong tape can remain overbought longer than expected.
The S&P has gone almost 4 months without a 3% pullback. While this is historically long in the tooth, the market has experienced rallies without pullbacks longer than usual. As recent as 2017 the S&P went almost 10 months without a 3% or greater correction.
Sentiment in the short term remains complacent and greedy. With the VIX trading sub 13 and the CNN fear and greed index flashing excessive levels sentiment is stretched.
The data presented shows a market that is elevated and overbought. While we believe in the short term the risk reward isn't great at current levels, there is still plenty of runway before investors get really euphoric. A pullback would be welcomed considering the strength of the rally from October but it isn't a prerequisite for this market to head higher.
