Saturday, January 5, 2013

When Is Fund Manager Equity Exposure Extreme?

This is a follow on to the prior post on fund manager cash balance data from the monthly BAML report. This time, we are looking at equity exposure. The charts are from the same article by Short Side of Long found here.

Like cash balance, there is a good signal when investors feel panic near market bottoms. Below 10-15% equity weighting and I will be looking long. Even in early 2008, there was a sizable bounce before heading lower. There were other reasons to ignore this signal later that year.

The next chart looks at periods when total equity exposure exceeds 50%. For a sentiment indicator, I think this provides a decent warning signal. Not to short, but to tighten stops and start to reduce exposure.