Wednesday, December 17, 2014

Fund Managers' Current Asset Allocation - December

Every month, we review the latest BAML survey of global fund managers. Among the various ways of measuring investor sentiment, this is one of the better ones as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $700b in assets.

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).

October: equities worldwide fell more than 7-10%; most markets were, at least briefly, negative for 2014.  Bond yields made new lows. Fund managers raised their cash levels back to 4.9%. Equity allocations dropped to their lowest levels in 2 years (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.

First Major Accumulation Day in 14 Months

The markets hit a large number of extremes at the end of last week (post). More were hit Tuesday (post). These, together with positive statements from the Fed today, created a major accumulation day (MAD). These are days when up volume on the NYSE is at least 9 times larger than down volume.

That is telling you that investors overwhelmingly see equities as attractive or oversold at current prices. It's a bullish sign and normally (but not always) initiates a move higher in price.

As an aside, 'tick' on the NYSE was also strongly positive today. We look especially for a cluster of ticks over 1000 after a strong period of selling. This means that many stocks are moving up on the ask, not the bid. The highest tick today was 1350, one of the 5 highest of 2014. Overall, the profile of tick is consistent with a MAD.

Today's MAD was 17:1. It was the first MAD since the October 2013 low in SPX. In the past two years, the only other MAD was January 2, 2013. Both of these initiated long moves higher in SPX.

Saturday, December 13, 2014

Weekly Market Summary

SPX and DJIA both closed at new highs a week ago; NDX did so the week before. This week, they each lost 3-4%. In the process, all their gains over the past 5 weeks, since the end of October, were eviscerated.

It might seem ironic that equities would fall so hard. After all, a week ago, one of the best employment reports in four years was released.

You can find any number of reasons for the plunge. The week after NFP is often weak. Most of the indices had hit long term trend line tops. SPX was near its 2100 "round number" resistance which in the past has been followed by a 3% or more fall. Measures of "dumb money", like equity inflows, had hit one year highs; when "dumb money" is happy to be long equities, the run is usually close to an end. These reasons, and others, were detailed a week ago here.

The question now is what lies immediately ahead. We think risk/reward on a one month basis is now positive. Let's review.

First, recall that last Friday SPX had completed a streak of 7 weekly closes higher. We looked at all 10 times that had occurred since 1980. All 10 made a higher closing high in the weeks ahead. That should be intuitive; 7 weeks higher is a sign of strong positive momentum that will not suddenly end. The trend needs to weaken before reversing. This week might be the beginning of a bigger weakening process, but it seems unlikely that last week's high marked a long term top.

Thursday, December 11, 2014

How Are Investors Positioned Heading Into 2015

The latest Federal Reserve flow of funds data provides an up to date view of households' current asset allocation. Let's review.

Household's largest holding is in equities; these comprise about 31% of their total financial assets. It troughed at 18% in early 2009. Current levels are above the recent highs of 29% in mid-2007. In 2000, it was an all-time high of 36%.

Tuesday, December 9, 2014

S&P 500 Company Sales Are Accelerating And Margins Are Expanding

S&P 500 company results for 3Q were really very good.  Let's review and discuss what this means heading into 2015.

Sales grew 3.9% on a trailing 12-month (TTM) basis. That is as good as analysts had expected. What is impressive is that sales growth is accelerating: a year ago, growth was 120 bp lower (2.7%; data in the next three charts is from FactSet).