Managers Cut the Cash, Set Stage for Selloff

Investor exuberance as evidenced in a recent survey of fund managers may have foretold the current market selloff.

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Portfolios have been reduced to a “dangerously low” 3.5 percent in cash, according to November’s Bank of America Merrill Lynch Fund Manager Survey. That coincides with 41 percent of managers saying they are overweight equities, compared to 27 percent in October.

The BofA Merrill results are in line with other sentiment surveys.

The American Association of Individual Investors reports 58 percent of investors as bullish, well ahead of the norm of 39 percent. The Investors Intelligence poll, which surveys newsletter editors, was a less frothy though still enthusiastic 48 percent bullish.

Anytime investors get this giddy about stocks it’s time to hide under the table.

Somewhat prophetically, Michael Hartnett, chief global equity strategist at BofA Merrill, said, “It’s possible that the year-end rally has already happened, leaving investors vulnerable to event risk such as a deepening European sovereign debt crisis or a dollar rally.”

Almost on cue, the markets Tuesday sold off more than 1.5 percent, capping a nearly 4 percent drop in the averages since Nov. 5, two days after the Federal Reserve announced the second go-round of quantitative easing.

Other nuggets from the survey:

Some 35 percent see the global economy strengthening next year, up from 15 percent the previous month, while 41 percent believe corporate profits will rise 10 percent or more.

Emerging markets continues to be the dominant theme, with 56 percent of managers saying they are overweight the group. Commodities hold an overweight position in 21 percent of portfolios, the same level as basic materials. Bond allocations dropped in popularity, with 36 percent saying they are underweight, up from 24 percent in October.

Respondents presciently said their biggest worry is sovereign default risk.

The survey asks 218 fund managers in charge of $634 billion for their opinions on the markets.

Judging by the market’s performance over the past two weeks, the survey is stacking up very nicely as a strong contrarian indicator.


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