When we quote investor “sentiment”, there’s three big data points we look at: the put/call ratio, the bull/bear ratio, and what’s going on within the Bank of America Fund Managers Survey. When everyone is buying calls, when everyone is bullish, and when fund managers are running little to no cash in portfolios that usually translates into future trouble. Those moments usually coincide with a punch bowl on the table, loud music, and plenty of singing/dancing. Too euphoric.
Forward returns actually look better when put buying > call buying and bears greatly outnumber bulls. That’s where we are now. The data within the BofA Fund Managers Survey also looks constructive. While fund managers have chased some equity risk in the past few weeks (adding to technology and communication services names and selling down utilities and staples), gross cash exposure within their portfolios remains high. The chart below captures the other rare observations of when fund managers are holding >5% cash in portfolios. It happens rarely and FORWARD RETURNS from such rare observations are very good. The last time cash was as high in this survey was April 2020 = AFTER we got hit by COVID and AFTER the market had already sold off -30%. High cash balances are symptomatic of market bottoms, not market tops.
FTD = follow the data
Chief Investment Officer
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