I’m going to stick my neck out and suggest that we may be fast approaching a key turning point in the stock market. I would now offer a bet with a 50% probability that we’ll have a proper market tantrum around May or June, with a 10% S&P 500 fall.
My logic is best summed up by this note today from analysts at Deutsche Bank in the US.
“Discretionary positioning is now near the all-time highs seen back in early 2018. So far, it has moved up in line with measures of growth with which it is historically very well correlated (67%). In the near term, positioning is likely to remain well supported, as growth picks up even further. However…. growth should peak sometime in Q2, potentially coinciding with a broader re-opening, warmer weather and an increased return to work at the office, arguably shifting retail investor attention away from markets as they find something else to do, and we are likely to see a pullback in equities”.
Last week saw the launch of the regular Bank of America Global Fund Manager survey.
As usual lots of interesting takeaways, starting with the bottom line : “investor sentiment unambiguously bullish: COVID-19 no longer #1 “tail risk”, 1st time since Feb’20 (inflation & taper tantrums now bigger risks); V-shaped recovery inducing jump in rate expectations, capitulation into cyclicals, biggest drop in tech exposure in 15 years; BofA Bull & Bear Indicator unchanged @ bullish 7.2.”
Other highlights included the following observations:
-“long tech” still deemed most crowded trade (then long Bitcoin & long ESG); but allocators cut tech to lowest OW since Jan’09; in contrast OW in banks largest since Mar’18, energy largest since Nov’18. FMS contrarian trades: long cash-short commodities, long utilities-short industrials if GT10 heading to 2%; long tech-short banks, long EM-short Europe if Fed YCC coming.
– conviction in UK equities continues to be on the rise…while optimism for EM equities has pulled back.
– A record 52% of investors now think value will outperform growth in the next 12 months.
– Higher-than-expected inflation overtakes COVID-19 vaccine roll out for top “tail risk” at 37% of FMS investors; #2 A “tantrum” in bond market, #3 COVID-19 vaccine roll out, #4 A bubble on Wall St. Record net 93% of FMS investors expecting higher global CPI in the next 12 months, up 7ppt this month
– cash levels are slowly starting to rise
Key takeaways for me? Start to take profits, build up cash, switch into value selectively, stay bullish on the UK