Cullen Roche at Pragmatic Capitalism recently highlighted the results of the latest AAII asset allocation survey, which indicated that individual investor equity allocations are at post-Crisis highs - a crowded long reading. As an aside, I find the AAII asset allocation survey to be more useful than the sentiment survey, because this is a case of watching what they do (asset allocation), not just what they say (sentiment).
TD Ameritrade also publishes a monthly survey of their customers' equity allocations, called the IMX Index (shown in green in the chart below). The IMX Index does not have as much history as the AAII surveys, but it does confirm the observation that individual investors are now plunging into the stock market.
With retail investors at a crowded long, is it time to get more cautious on U.S. equities?
Institutions are still buying
Not yet. Institutions haven't finished buying. The latest BoAML Fund Manager Survey of institutions show that institutional investors are bullish on the macro outlook but they are not yet in a crowded long position yet. The survey results, released in mid-December, states that institutions are turning positive on the global economy:
The proportion of investors believing the global economy will strengthen in the year ahead has risen to a net 71 percent from a net 67 percent in November. Conviction in the global economy is far stronger than 12 months ago when a net 40 percent of the panel predicted it would strengthen.
Cash levels remain high, which are supportive of higher prices in light of an improving fundamental outlook:
Average cash balances stand at 4.5 percent of portfolios, historically a level that is a positive signal for equities. A net 16 percent of asset allocators say they are overweight cash, up from a net 9 percent in November. The higher cash levels coincide with expectations of higher interest rates and a belief by three-quarters of the panel that the Fed will introduce tapering in the first quarter of 2014.
The chart below shows the aggregate asset allocation by fund managers. Managers are significantly overweight European and Japanese equities and overweight U.S. equities, though not at excessive levels. The U.S. equity overweight is barely 0.5 standard deviations above its historical mean, which is just noise.
In addition, the Street's consensus is turning towards better economic momentum in 2014 and the chart below from BCA Research is one of many examples. The improvement in the global macro outlook is a major reason why fund managers are taking on greater equity risk.
With positive economic momentum and improving fundamentals pushing institutional portfolios into a higher equity allocation, U.S. stock prices appear to have further room to run in the next few months. By mid-year, institutional buying will likely have pushed stock prices higher and moved fund managers closer to a crowded long position. Should those events transpire, my base scenario of a strong first half of 2014 and a weaker second half for the stock market (see My plan for 2014) is starting to look pretty good.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui's blog to ensure it is connected with Mr. Hui's obligation to deal fairly, honestly and in good faith with the blog's readers."
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