Still reasons to be bullish on stocks: Managers

Investors trying to find value in equities may be better served looking to a group of global macro, tactical bettors referred to as ETF strategists rather than trying to track the so-called "smart money" of hedge fund managers.

In August, Soros Fund Management loaded up on bearish bets against the U.S. stock market. Meanwhile, the smart money that continued to show conviction on U.S. equities was doing so with their finger on the "sell" trigger, making short-term bets on exchange-traded funds rather than historically longer-term commitments to mutual funds.

Fast-forward to last week, and traders were seen to be unloading the market "insurance" they'd had in place. Brian Stutland of Equity Armor Investments told CNBC, "To me, when we get the market down and yet people are taking insurance off, it tells me that the smart players out there are trying to buy into this market—remove the insurance, and play to the upside in stocks."

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So good luck keeping track of the smart money. Last week's market action didn't help much, either: a three-day losing streak followed by the biggest gain in six months on Friday. As an alternative to the short-term noise, here is the reasoning from some big ETF strategists on why they continue to be bullish on stocks.

"I would put us in the camp of cautiously optimistic" said Chris Konstantinos, director of international portfolio management at Riverfront Investment Group, which manages roughly $5 billion in ETF portfolios. He said Riverfront's long-term valuation model shows greater value outside the U.S.—within the U.S., Riverfront believes the market is fair-valued, with pockets of overvaluation.

Konstantinos said, "Our shorter-term, more tactical view is that with interest rates so low and a high level of central bank accommodations happening across the emerging and developed worlds ... it presents a historically good backdrop for [stock] multiple expansion."

James Breech, president and CEO of Cougar Global Investments, which has more than $1 billion invested in ETF strategies, said the investment firm's outlook on the U.S. economy is the most bullish it has been in the last 20 years.

ETF flows show that investors are not worried about a giant pullback or overly excited about a giant runup, according to ETF.com data. "Everyone acknowledges that the S&P 500 is having a good run, but we are not hearing the panic from investors that we are at the top and it's going to crash," said Matt Hougan, president of ETF.com.

Konstantinos said while U.S. small and mid-cap stocks may be stretched at the moment, large-cap are at fair value and could keep going higher. "We can already see the end of quantitative easing in the U.S., and even if interest rates rise from such low levels, it wont necessarily shut off growth anytime soon," he said.

Cougar is reducing its weightings in U.S. mid-cap stocks, Breech said, of which it usually holds a large overweight position, ranging from 25 percent to 48 percent of its portfolio.

Last week, gold hit its lowest level in over a year, and inflation hawks who have been rattling their gold sabers ever since quantitative easing began are finding it harder and harder to support their long-held contentions. It's a situation leading ETF strategists to be very careful, and limited, with commodities exposure.

Gold and other commodities that traditionally move in the opposite direction of the dollar—crude oil touched a two-year low last week—could continue to see bearish pressure.

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"The shocking thing about gold is that no one seems to care anymore," Hougan said. "It's been cast off to the irrelevancy it had in 1992; investors are not bearish or bullish on it; they have simply stopped caring."

The gold bugs' day may have passed, but even an investment shop that is more bullish than it's been in two decades about the U.S. economy thinks there is still a place for gold in the portfolio, especially as a geopolitical insurance contract. Cougar Investments is hedging its U.S. stock strategy by investing 5 percent of its holdings in gold ETFs.

"We have gold because we see a 6 percent probability of chaos from the situation with ISIS, Ukraine, Gaza, and the trouble in the South and East China Sea," Breech said.

• In September, ETFs pulled in $17 billion in assets.
• Near-$15 billion went into U.S. equity ETFs.
• After shedding $8 billion in August, the SPDR S&P 500 ETF took in $11 billion in September; U.S. large-cap stock ETFs took the biggest haul overall in September.
• While Cougar Investments said it's decreasing exposure to its usual portfolio ballast, mid-cap stocks, the overall ETF flows data is decidedly undecided on mid-caps: Two mid-cap ETFs were among the top 10 in flows in September, but one big mid-cap ETF was among the top 10 losers of assets last month.
• The Consumer Staples Select SPDR was the only sector ETF to be among the top 10 in September flows.
• $3.7 billion went into international equity ETFs, and emerging markets equity ETFs took two of the top 10 spots in September flows: iShares MSCI Brazil Capped, and Vanguard FTSE Emerging Markets. But the EM story is less than clear: iShares MSCI Emerging Markets was the third-biggest loser in September flows.
• Commodity ETFs were the biggest loser among all ETF categories, seeing net outflows of more than $1 billion, led by $1 billion outflows in SPDR Gold and iShares U.S. Energy.

(Source: ETF.com)