Fund managers are turning to cash, should you?

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There was little to deter investor fears last week. Despite a glimmer of hope over the Ukrainian conflict at the end of the week, many feared an invasion. The higher than expected producer price index (PPI) did not help. The outlook of professional investors and the public regarding the stock market has certainly changed over the past three months.

In November 10and American Association of Individual Investors survey, 48% were optimistic. In last week’s survey, the bullish % fell to 19.2%. It was the 29and lowest value since the start of the survey in 1987.

This chart above is taken from a 2020 review of stock market sentiment that was released just before the stock market collapse in the spring of 2020. The chart shows that at the February 2016 low, when many were also concerned about another recession, the percentage up was also 19.2%. About a month earlier, it was even lower at 17.9%, which was the lowest reading since 2005.

It is important to note that a low reading does not mean that the stock market has bottomed out. In the past, bullish sentiment in % has often bottomed long before prices. In February 2016, you had to have a bottom confirmed by the lead/fall analysis, point 1, before buying. The A/D line had turned negative at the beginning of 2016, point c, which warned of an impending decline in the stock market.

The Spyder Trust (SPY) daily chart shows that with the close of Thursday and Friday of last week, it appeared to have completed a bearish flag formation, lines a and b. As is often the case, the intraday charts gave an early warning. During Monday’s decline, S&P futures completed a similar formation (see Tweet).

The formation of the daily chart favors a further decline towards January 24and low at $420.76. The daily S&P 500 Advance/Decline line is in a short-term downtrend and is below its WMA. If the support at the e line is violated, the SPY could fall below the January lows. To signal that a bottom is in place, the A/D line must move above the resistance at the d line and the c line.

In last week’s recap, the Dow Jones Industrial Average was the weakest falling 1.9%, followed by declines of 1.7% and 1.6% in the Nasdaq 100 and S&P 500. This was also a negative week for the Dow Jones Utility Average and iShares Russell 2000 which were down 1%. Only SPDR Gold stocks bucked the trend gaining 1.9% and are now the only positive year-to-date (YTD)

Of course, the people interviewed by AAII are just one group of investors. The latest survey of fund managers from Bank of America also revealed surprising results. Between February 4and and 10and they surveyed 314 fund managers who have $1 trillion in assets under management.

In my experience, a number of survey results suggest that the current decline will be followed by a rise in stock prices in the 2n/a trimester. One of the most surprising is that “the net allocation to the technology sector has fallen to the lowest since August 2006”.

The Technology Sector Select (XLK) weekly chart from 2005-2006 reveals that in 2006, XLK was down 16.6% from April 7th.and to July 14and. Relative performance analysis indicated that XLK was weaker than the S&P 500 from April (see arrow). On August 18 (line a), the RS analysis had become positive again. In other words, while XLK was at its lowest, fund managers weren’t bullish on tech stocks. It turned out that XLK reached a new high in October 2006.

XLK reached a high of $177.04 on December 28and 2021 and fell to a low of $146.24 on Jan 24and. There was a 17.3% decline from high to low. At Friday’s close, the weekly and daily technical indicators are negative but the comparison with 2006 is interesting.

The survey also showed that managers are “hoarding cash”, as it made up 38% of their portfolios with just 31% in stocks. The overall cash level of 5.3% was the highest since May 2020.

The Invesco QQQ Trust (QQQ) weekly chart shows Friday’s close not that far above January 24and low at $334.15, line a. From the November 2021 high to the January low, there was a decline of 16.4%. The weekly starc band and the May 2021 low at $316.20, line b, are potential targets if the January lows are breached.

That would be a 22.6% decline and may be why 30% of fund managers are looking for a bear market in 2022. The standard definition is for a decline of more than 20%. Of course, it is also possible that we test and hold near January lows and then close back above $370, which would be a positive sign.

The weekly Nasdaq 100 Advance/Decline line is in a clear downtrend with last week’s action and shows no signs of bottoming. On the NYSE last week, 1472 issues were up and 2101 down and it would probably take two or three weeks of positive A/D numbers of 2-1 to get it back positive again.

Reviewing the eleven S&P sectors only five; Energy Select (XLE), Materials Select (XLB), Financial Select (XLF), Health Care Select (XLV) and Utilities Select (XLU) show positive weekly relative performance. This currently means that many of these ETFs are down less than the S&P 500. These are the areas I’m focusing on in the coming weeks.

The low bullish % readings of the AAII survey and the high cash levels of fund managers are in my opinion good reasons to look for buying opportunities and not selling. Some stocks and sectors should bottom before market averages and A/D lines should turn positive near market lows.

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