Bank of America says sell stocks on the vaccine as overconfident investors dump cash for equities

Published Tue, Dec 15 20201:31 PM ESTUpdated Tue, Dec 15 20201:57 PM EST

Investors have been cutting cash levels to buy stocks, the latest sign that the market may be due for a pullback at least in the near term. Cash balances fell to 4% of portfolios in the December Bank of America Fund Manager Survey, the firm reported Tuesday. As a result, professional investors are underweight cash for the first time since May 2013. That has triggered a sell signal under the metrics Bank of America uses to measure sentiment among portfolio managers. When cash levels have fallen to that point, the typical S & P 500 returns for the next month are negative 3.2%, the firm said. From an investment standpoint, BofA chief investment strategist Michael Hartnett recommends taking some chips off the table into 2021. That in itself is a piece of contrarian advice as investors get excited over the prospects that coronavirus vaccines are lessening the chief risk factor the market has been facing for the past nine months. "We say sell the vaccine 1Q21," Hartnett said in his narrative accompanying the survey. Other contrarian trades he lists for the early part of next year are to be long cash while others cut allocation; he's also long the U.S. dollar and short emerging markets. On sector bets, he recommends buying energy staples and selling tech and industrials. The reduction in cash comes amid a raft of other sentiment indicators pointing to overheated optimism. The American Association of Individual Investors weekly survey of retail positioning is showing bears outweighing bulls by 26 percentage points, well above the 60-year average of 7.5 percentage points, according to Morgan Stanley. Also, the put-call ratio is around its lowest level since the dot-com euphoria in July 2000. The measure looks at options allowing investors to buy shares against those allowing them to sell and is a widely cited contrarian indicator. Brokerage houses also have cut cash allocations to 12% in November from 21% in August, while money market balances, which swelled during the early days of the pandemic, have seen much of the cash stowed away since then leave. Finally, Morgan Stanley also point out that short interest on the S & P 500 is around a two-decade low as well. "Investors need to balance optimism on the economy with an expensive stock market that could face tighter financial conditions, higher inflation and lower valuations," Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note. "Consider shifting portfolio construction from asset allocation and sub-style positioning to patient, disciplined and opportunistic security selection." Wall Street still likes stocks Morgan Stanley remains constructive on the market for the year ahead, though Shalett points out that the firm's full-year target is only about 6.5% from current S & P 500 levels. The firm currently is overweight U.S. stocks, though it recommends active stock picking rather than holding indexes at a time when returns are coming mainly from tech stocks "linked to the "work-from-home and smart-phone ecosystems. Those leaders are likely fully priced, facing tough year-over-year comparisons and decelerating sequential momentum," Shalett wrote. To be sure, most Wall Street firms remain highly optimistic on the market, with price targets indicating double-digit returns while acknowledging some likely early-year slowness. In fact, when looking at longer-term indicators, investors right now may be underpricing the prospects for stock market growth as the economy continues to improve , according to Jim Paulsen, chief investment strategist at the Leuthold Group. Paulsen looks at another measure — the total return comparison of investors buying high-growth, or beta, stocks compared with low volatility. That ratio is about 4.4 to 1, when in normal times it would be around 5. At the same time, the Citi Economic Surprise Index, which measures data against Wall Street estimates, remains close to what would have been record highs prior to the pandemic. (The high was shattered in mid-June when the economy started recovering and expectations remained low.) The current level still suggests that Wall Street forecasters haven't caught up with the data. While Paulsen acknowledges that "investor sentiment is extended today" and a near-term pullback is possible, he recommends viewing some of the more convention measures "with a bit of skepticism" due to the unusual pandemic-related circumstances. "Investor confidence has improved in recent months, and that could be correctly signaling a near-term stock market correction," he wrote. "However … from a longer-term view, investor conviction has recovered from 'extremely pessimistic' to merely 'pessimistic,' which leaves considerable room, yet, for investors to get far more cheerful."

People walk past the New York Stock Exchange (NYSE) and 'Fearless Girl' statue at Wall Street on December 9, 2020 in New York City.

Angela Weiss | AFP | Getty Images

Investors have been cutting cash levels to buy stocks, the latest sign that the market may be due for a pullback at least in the near term.

Cash balances fell to 4% of portfolios in the December Bank of America Fund Manager Survey, the firm reported Tuesday.

As a result, professional investors are underweight cash for the first time since May 2013. That has triggered a sell signal under the metrics Bank of America uses to measure sentiment among portfolio managers.