Sour Investors Sitting on Record Amounts of Cash: Recipe For a Rally!?

Last weekend we showed the market had only two options left. See here.  This week, the market has not yet (in)validate either option so we don’t really need to update the short term picture until it does.

Instead we can focus on some indirect evidence, aka contrarian indicators: investor sentiment and fund allocations. The combination of both can be a powerful insight in understanding the market’s next move as it shows the proverbial “put your money where your mouth is“.

Sentiment first: believe it or not, but the percent Bulls in AAII’s weekly sentiment survey came out even lower than last week (-1,7%), while the percentage of bearish investors was even higher (+ 4.1%); 23.7% vs 37.8%. Historical averages are 38.5% and 30.5%. Per AAII: “Optimism was last lower on June 22, 2016 (22.0%). This week’s drop puts optimism below its historical average for the 50th consecutive week and the 83rd out of the past 85 weeks. This week’s bullish sentiment reading ranks as the 104th lowest reading out of the more than 1,500 weekly results recorded during the 29-year history of our weekly survey.” In conclusion: there’s barely a bull left and markets don’t top with such sour sentiment. They rally.

To add to this thesis, please take a look at the Bank of America-Merrill Lynch Global Fund Manager Survey. (See here for full report). From that report it follows that cash holdings among institutions are at record highs: 2nd highest reading since 2001. In addition, equities holdings are at 4 year lows, while 42% have bearish views of the market. Yes, cash balance levels are now even higher than during the 2008/2009 market crash and any market correction post and prior (see black arrows, figure 1), except 2001.

Figure 1. Fund Manager Cash Balance at record highs that rather coincide with bottoms not tops. 


Bottom line: nobody seems to believe in this market anymore. Less than 1 in 4 individual investors are bullish and large institutional funds are at record cash: contrarian enough!? Rally time!?

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