The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal.
Here's a brief recap of the past several months:
July: fund manager equity allocations reached a bullish extreme. At +61% overweight, it was the second highest since the survey began in 2001, a clear risk to near-term equity performance (post).
August: the Euro 350 dropped 8% and SPX dropped 5%. In response, equity allocations fell and cash shot up to 5.1%, a high level associated with lows in equities (post).
September: equities in the US hit new highs; Europe rallied, but fell short of new highs. Fund managers raised their global equity exposure and reduced their cash (post).
November: new uptrend highs in the US, Japan and Germany; cash levels fell and equity allocations rose to near their prior highs.
Since then, equities have again fallen. So it's not a surprise to see that in December, cash is now up at 5% again. This is a strong positive. But, strangely, equity allocations are also up to a 5 month high. To say that there are mixed signals is an understatement.
Let's review the highlights from December.
Fund managers increased their cash levels to 5%. Instances are very low, but over 5% represents bearish sentiment: this is where bottoms in equities have formed in the past. The last three times cash was over 5% was in June 2012, May 2014 and August 2014. Each time, SPX rose in the month ahead.