A strange paradox emerges when flipping though the latest BofA Fund Managers' Survey: with the S&P trading at all time highs, it appears that nobody trusts this market. Two specific indicators point to this. The first one is that as BofA's Michael Harnett points out, July cash level are now at 5.8%, up from 5.7% in June and the highest since Nov’01.
But more notably is that at least according to the survey respondents, investor buying of protection against sharp decline in stock market at record high, something which would not be happening if the market was "normal" and if traders expected a continuation of the recent upward trend in stocks. It may also explain why the levitation continues to be on virtually no volume - simply said, nobody, except algos, squeezed shorts and the occasional stock buyback order, are participating!
BofA also observes that with the S&P at record highs, it has just observed the first equity underweight positioning in 4 years, "albeit very marginal." Naturally, this too would suggest that at least according to institutional investors, more believe the market is poised to drop than rise at this point.
What is the source of this dramatic shift in perceptions? It may be Europe, where 4% of global fund managers are underweight Eurozone stocks this month, compared to net 26% overweight last month - the largest ever single-month drop in positioning. BofA highlights the "unwind of big short in UK, Eurozone, Japan, banks requires big Japan fiscal stimulus + EU bail out for Italian banks."
Also, blame the UK: Investors looking to short UK equities are the highest since December 2009.
How are traders positioned relative to history: the chart below shows the July investor positioning relative to history: According to BofA, contrarians would go long equities, energy, UK/Eurozone, GBP & EUR; Contrarians would short cash, REITs, tech & healthcare.
So in light of all this skepticism, how are investors positioned - according to BofA, the most crowded FMS trades are long quality stocks (34%), long US/EU credit (20%) & short EU banks (17%)
And these are the biggest risks perceived by the investor community.
How does it all end? Why with helicopter money. with a record net 44% of investors thinking global fiscal policy is currently too restrictive, as of this moment, 39% expect helicopter money in the next 12 months (up from 27% last month). Soon this group will be a majority.
So how to trade all of this? Here is BofA's take on the biggest pain trade right now:
Pain trade is long banks, short credit or quality; unwind of big short in U.K., Eurozone, Japan, banks requires big Japan fiscal stimulus and EU bailout for Italian banks