This survey of global investors is useful because it often pays to do the opposite of the crowd

Traders work at Goldman Sachs booth on the floor of the New York Stock Exchange in New York.Scott Eells | Bloomberg | Getty Images

You have to hand it to the global fund managers. They’re a great bunch to play against.

Every month, Bank of America Merrill Lynch conducts a survey of roughly 200 global fund managers. What the trading community wants to know is how long or short they are certain key segments of the market?

Why? Because these are often contrarian indicators.

This month is no exception. For nearly three months, the market has been in an uptrend, but fund managers have turned defensive. They are long cash, REITs, utilities, health care, and emerging markets.

They are short equities in general (allocation to stocks dropped to the lowest since September 2016.), industrials specifically, and the UK and the Eurozone.

If you use this as a contrarian signal, it’s pretty clear: high cash levels is a buy signal for equities.

Even the authors of the report, which include Chief Investment Strategist Michael Hartnett, admit the value of its use as a contrarian signal: “contrarians would be long stocks vs. cash; long EU vs. EM stocks, long industrials vs. REITs.”

What’s all this mean? It means the “pain trade” for stocks is still up, as the report admits. That is, the market trend that would cause the most pain to the most participants is a continuing rise in the markets.China slowdown is top fear

What worries this global bunch the most? The top risks remain a slowdown in China and a trade war. These were the two biggest worries of 2018, and they have remained so into 2019. What’s not on the list any more is fear that the Federal Reserve or ECB would make a “policy mistake” by hiking rates too fast. This was the big worry more than a year ago, but it has faded.

Investors have come to believe that central banks have their backs, and that is the primary driver of improving macro sentiment.

Another favorite to watch, “most crowded trade,” was to short European equities. Again, this is another classic contrarian indicator. “Long FANG” stocks was a favorite most crowded trade more than a year ago, and of course that went wrong in the fourth quarter.

Not surprisingly, “short European equities” is showing signs of playing out. After underperforming the United States for over a year, Europe (STOXX 600) has been outperforming the United States this month.

Fund managers get defensive (March Merrill Global Fund Manager Survey):

  • Long: cash, REITs, utiltities, health care, emerging markets
  • Short: equities, UK, industrials, eurozone
  • Contrarian signal: high cash levels is a buy signal for equities.
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