Cash levels in portfolios have fallen to a 15-month low, according to one survey that suggests a thawing in investor sentiment even as the market enters its historically worst month.
As the Standard & Poor's 500 added another 2 percentage points in August to its 12 percent year-to-date gains, investors dropped cash levels to 18.1 percent of their portfolios, the lowest since May 2011, a poll from the American Association of Individual Investors showed.
The shuffling coincided with a 0.7 percentage point increase to stocks to 60.5 percent of total portfolios, and a 2 percentage point increase to bonds to 21.4 percent.
The moves represent respective four- and six-month highs and come as September, with its traditionally negative returns, looms. (Read More: Rough Path Ahead? September is Dow’s Worst Month)
"Equity allocations increased as short-term sentiment improved during the first three weeks of the month," Charles Rotblut, vice president at AAII and editor of the organization's journal, said in a statement.
The August action brought portfolios near the AAII historical averages of 60 percent to the stock market, 16 percent to bonds and 24 percent to cash.
"AAII members remain concerned about the pace of U.S. economic growth, the possibility of higher taxes and federal budget cuts in 2013, and the European sovereign debt crisis," Rotblut said. "They also remain frustrated with the low current yields and worry that interest rates could move higher in the future."
AAII's results have come under some scrutiny in the past for the methodology used to reach them, in particular because of the small sample size and composition of respondents. The survey, in fact, is often used, as are multiple other sentiment measures, as contrarian indicators of market direction.
Indeed, the AAII survey runs counter to behavior reported by organizations that track fund flows.
For instance, the Investment Company Institute, which helps the government follow money flow, reported outflows from stock-based mutual funds every week in August, with the most recent showing nearly $5.9 billion in outflows. Lippershowed just one week of inflows for August and outflows of $1.4 billion for the most recent period.
The ICI, though, has shown a slow but steady outflow from money market funds, where most investors keep cash. Money market cash fell to $2.55 trillion last week.
The AAII survey results, which are widely followed on Wall Street, thus came unexpected even to bullish market experts.
"I'm a little surprised. It doesn't show up in the fund flows," says Jim Paulsen, chief market strategist at Wells Capital Management in Minneapolis. "If the treatment mediawide and even among individuals starts to change a little bit, then people start to say rather than, 'Am I conserving enough in this high-risk world?' to "Am I missing out?"
The AAII poll comes at the same time as Bank of America Merrill Lynch reiterated that its own proprietary sentiment measuring-stick, the Sell Side Indicator, has reached pessimism levels not seen in 27 years.
But BofA views the high levels of fear as an opposite arrow, indicating that a huge rally could be on the way. The first 27-year low hit for August, which saw a 2 percent gain in the S&P 500.
"Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism and the fact that strategists are recommending that investors significantly underweight equities at 44.4 percent vs. a traditional long-term average benchmark weighting of 60-65 percent," Savita Subramanian, equity and quant strategist at BofA, said in a note to clients. "The indicator remains firmly in 'Buy' territory, a signal that it first flashed in May."
Over the course of time, stocks have rallied a median of 30 percent when the diffusion measure falls below 50, with a median gain of 30 percent. That would indicate an 1,831 on the S&P 500 12 months from now.
What's more, Subramanian said, is that stocks have never had a negative return at these Sell Side Indicator levels.