US indices may be in danger of running too far, too fast, judging by Merrill Lynch’s latest monthly fund manager survey.
Last month’s extraordinarily high cash levels of 5.8 per cent - a level seen just twice over the last 15 years - have plunged to 5.0 per cent, the biggest monthly drop since August 2009. It’s “not yet” a tactical sell signal, says Merrill, but a two-month fall of one percentage point has historically triggered selloffs. Accordingly, analysts will be watching as to whether cash levels fall below 4.8 per cent in December.
Contrarians will be attracted to non-US regions, where sentiment is less heady. Cash has not yet rotated into European equities and allocations are below average ahead of the upcoming Italian referendum, despite a spike in the number of managers seeing European stocks as undervalued. Allocations towards the UK are even more stretched to the downside, registering the second-lowest reading since the 2008-09 financial crisis, despite a record number believing sterling to be undervalued.
Last month, a Donald Trump victory was regarded as one of the biggest market risks; now, it’s seen as “unambiguously positive” for US economic growth. At July’s bond market peak, bond allocations hit their highest level since 2013; now, everyone believes the 35-year bond bull market is over. As always, Merrill’s survey is a reminder that fund managers are a fickle bunch.
Ordinary investors finally turning bullish
Trump’s election win has had a similarly uplifting effect upon ordinary investors. Bullish sentiment, as measured by American Association of Individual Investors (AAII) polls, had been below historical averages for a record 54 weeks. That run has ended - bullish sentiment has hit 21-month highs, having doubled over the last fortnight.
The masses have long been iffy about this long bull market, sentiment remaining muted even as stocks continued to hit all-time highs. It will be interesting to see if the Trump effect persists; if so, it would indicate ordinary investors are finally ready to embrace equities.
Market breadth remains healthy
An advancing stock market is not always a healthy one; sometimes, poor market breadth can indicate underlying weakness, as it did in 2000, 2007 and late 2015. Is that happening again?
More than 300 New York Stock Exchange issues recently hit 52-week highs. That’s a large number, but even more stocks hit 52-week lows, and such binary action is often associated with oncoming selloffs.
Don’t be spooked, however. The NYSE data is distorted by debt-like issues that have been victims of the huge bond market selloff, notes LPL Research strategist Ryan Detrick. Looking at common stocks only shows that while 319 stocks recently hit new highs, just 21 fell to new lows. Similarly, small-cap and mid-cap indices have hit all-time highs, confirming this is a broad rally rather than one led by a small number of high-fliers.
Overbought markets can dip, but any pullback looks likely to be a short-lived affair.
Druckenmiller does a U-turn on stocks
The bull market is “exhausted”, warned iconic investor Stanley Druckenmiller last June. Buy gold and “get out of the stock market”.
At the time, this columnist recommended investors not worry about the high-profile warnings of big-name investors like Carl Icahn, Druckenmiller and his former partner, George Soros. The point being made was that Druckenmiller may be one of the most successful investors in history, but he’s not psychic; rather, he’s a flexible fellow who changes his mind at the drop of a hat.
Now, Druckenmiller has certainly changed his tune. “I sold all my gold on the night of the election”, he told CNBC. “Quite, quite optimistic” about the US economy, he’s selling bonds and betting on growth stocks.
Ordinary investors can get spooked when they hear high-profile figures issue dire market warnings, but professional traders can do an about-turn in months, weeks or even days. To repeat what I said last June, “ignoring the big-name investors may be a wiser strategy than trying to piggyback on their trades.”
Wilbur Ross gets his sums wrong
Billionaire investor Wilbur Ross, best known in Ireland for buying into Bank of Ireland at the height of the banking crisis, is widely tipped to become Donald Trump’s commerce secretary. Despite his reputation for investment savvy, however, Ross may need to brush up on his maths skills.
Ross has played down fears of a trade war with China, saying Trump’s threat to slap a 45 per cent tariff on Chinese imports would only be enacted if it was found that China’s currency was undervalued by 45 per cent.
Not so, noted a Financial Times reader last week. To take China’s export prices from 55 per cent of fair value to 100 per cent of value, the letter writer pointed out, would require a tariff of 81.8 per cent, not 45 per cent.
“I trust Mr Trump’s grasp of arithmetic is better than his adviser’s”, he concluded. Ouch.
