The stock market should continue to rally as investor positions continue to weaken, according to Bank of America.
The bank stressed that while active managers say they are optimistic about stocks in surveys, their investment portfolios do not reflect this view.
Stocks could extend their current bull market until these two things happen, according to Bank of America.
And in my Friday note, I highlighted that Investor surveys It showed a significant rise in bullish responses over the past few months as the stock market soared. But the portfolio position data for active investment managers did not reflect the increase to the upside.
“Investor surveys suggest the downward trend on risk assets, economic growth and equity returns has eased from here. But only hedge fund and long-term fund holdings data still reveals very conservative biases,” Subramanian said.
For example, the bank’s latest survey of fund managers shows utility stocks the least overweight sector, but hedge fund holdings data shows a net long position of 20% in utilities, a near record high.
“Our BofA Fund Managers Survey and our Institutional Factors Survey are inconsistent with the most recent holdings (and have been for a while),” Subramanian said. “Fund Managers Survey: Getting Warmer. Holdings: Still Very Defensive… Although recession fears have faded, active equity exposure to cyclical sectors versus defensive sectors and high-beta stocks remains well below average.”
Subramanian said the bearish positions among hedge funds come at a time when investors should play a more offensive than defensive role in the stock market. This means that the 5% sell-off in shares this month is likely to be a buying opportunity.
Investors should stick to cyclical stocks, Subramanian said, referring to companies that follow economic cycles closely, such as consumer discretionary stocks and technology stocks, and are not on recessionary defensive positions, such as healthcare and utility stocks.
But her bullish outlook for stocks could collapse very quickly if two things happen:
The first is for hedge funds to do what they say they are doing and dramatically increase their exposure to cyclical stocks, high beta and away from defensive assets.
Such upward shifts can be seen as conflicting indicators of future weakness.
The second is if the macro-economy deteriorates so significantly “that the current low defensive bias of fund managers is justified,” Subramanian said.
“Until a combination of the two happens, pain trading is higher in cyclical sectors and higher beta stocks, in our view. Today’s macro data including the latest global earnings revision ratio and our US system model tell us that now is the time to attack, not attack,” Subramanian said. for defence.”
Read the original article at Business interested