Fundies went long directly into market rout

This is two weeks old but it is worth revisiting the BofA fundie survey:

Bottom line: respondents in our October Fund Manager Survey (FMS) said the recession is over, reduce cash, pause cyclical rotation, and price in contested election & February vaccine; we say sell SPX >3600 and cyclical rotation via banks/energy to resume in Q4.

On cash: FMS cash levels fell to 4.4% from 4.8%; cash <4% = greed, >5% = fear; cash levels have collapsed 1.5ppts in past 6 months, fastest drop since 2003; BofA Bull & Bear Indicator at 3.8, indicates final capitulation into risk ahead in Q4.

On macro: big majority (59%) expect either a W- or U-shaped recovery (just 19% say Vshaped); despite US fiscal policy kabuki, FMS recession expectations collapsed: many more investors (60%) now say we are in an “early-cycle” phase of the economic cycle.

On AA: FMS investor optimism on stocks higher (net 27% OW) but not yet extremely bullish (i.e. >50%); hedge funds notably raising net equity exposure (42%, highest since Jun’20); both bond and stock global allocations back to pre-COVID levels.

On COVID-19: pandemic remains #1 “tail risk” for FMS investors; timing of credible vaccine pushed back from Jan’21 to Feb’21.

On US election: now 2nd largest tail risk; asked what outcome causes volatility 74% say “contested election”, 14% “blue wave”, 8% divided Congress, 4% say Trump victory.

On FMS extremes: 5th largest short in energy in 20 years; healthcare OW surges to #1; long tech still deemed #1 “crowded trade” by big margin; FMS “cyclical rotation” paused in Oct, “sellers strike” in tech, “buyers strike” in energy & banks.

Oct FMS contrarian trades: long UK, energy, bank stocks, short US, healthcare, tech, and consumer discretionary stocks.

How preposterous. The contrarian trade is short equities and long credit as the virus guts the North Atlantic ec0nomies.

FOMO had killed fundie brain cells going into this correction.

David Llewellyn-Smith
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Comments

  1. I moved my super out of equities and back into cash on 19-Oct. Best timing I’ve ever had on one of those decisions.

    • Oct 19? Which year! ( October every year is a risk. I did something similar several years back when it was ‘obvious’ that things couldn’t keep going as they were. They did, and I retained my conviction. Silly me!)

        • Some illumination for you guys in the dark. WW
          Back in April – May, Australia’s largest provider of trade credit insurance
          had doubts about the future for Myer and David Jones
          Thus it stopped providing insurance for suppliers to cover the risk of not getting paid by either
          The short position, then, in MYR was 15%
          It is now about 9%
          So the top share holders, right now, are
          Lew, Premier Inv at 10%
          Short Sellers at 9%
          Wilson Asset management at 8%
          Now MYR is tightly held, those short guys are by the short and curlies
          The Chairman has been given the boot, and the rest of the board is next
          Read the annual report by King, and tell me what you think, of the pictures
          What will happen next.?

      • lol, I did the same, got out a couple years ago. Bit early definitely and missed out on some gains but I’m happy enough with the decision. When a new business cycle looks like it is getting going I will get back in. Until then, I’m just going to stick with mostly cash. And some precious metals. And some crypto.

        • can’t blame u at all, 2018 the vix explosion due to who would have thought? excellent ADP and non-farms…lol…. and ‘balance sheet reduction on auto pilot” , things could get even more nutty if that balance sheet goes more vertical. Maybe sit back until the Fed conjures up some more crazy ‘tools’, like I don’t know, just more illegal stuff like what is probably going to happen, u know more stuff they have recently got away with and no one seemed to care……… mmmm……. oh stuff it just retire the debt

      • It’s not that hard.
        Firstly – don’t catch the falling knife (classic mistake)
        Sit back and let the action play out – is there likely to be a sustainable recovery in stocks this side of the election? Highly unlikely.
        See how the election pans out first — if political uncertainty, then sit on your hands till the picture is clearer.
        Market technicals will give you a reasonable idea of whether/when a ‘bottom’ has formed at which point you can start to buy back in. You won’t get in at the ground floor that way but the 2nd or 3rd floor is fine.

      • The bottom is a bit like the top. Clear in hindsight, but difficult at the time. I suppose it occurs at the inflection point of news. At the top the market continued to rally despite CV19, but after the border closures started to happen, then Italy the news became consistently bad. It’s easy to see the before and the after but the inflection point is hard. I guess you have to take a position and have conviction. I would say at the moment a V shaped recovery is likely to be crushed with these European and likely US lockdowns ahead. The lockdowns will spread across the northern hemisphere and escalate in severity, they are way behind the virus curve. This will crush the market. Perhaps opening up and the warmer weather in March/April will be the trigger for a bounce back along with a vaccine around that time. But a second market route could be very damaging for sentiment as lot of people are all in and convinced the worst is behind us. Could create more intense panic than the first round.

  2. it would be great if s and p busts 200 ma, that might be worth a shot. But if u listen to Felix on Grant Williams podcast, he reckons it’s quite possible the top is not in and if there is a rotation to value it can be easy to miss as it could happen at an unexpected time. If someone can tell me when Telstra bottoms, that would be great.

      • ha good one, that’s the way it looks. Would be nice if it was one of those stocks that people accidentally bought because it was a look a like name ie Telstra looks a lot like Tesla. The aussie Tesla.

        • TLS has no future
          Elon musk is about to take over nearly the whole of their market
          they were a boondoggle for the govt and mates in the day, but have been exposed
          read the plumber story on the becker post this arvo

          • thanks Wiley, looking forward to the post. I have been naive thinking they can’t be that bad and even read lots of their info.