Institutional Investors Slash Equity Allocations

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Topdown Charts

Summary

Global institutional investors have slashed equity allocations to the lowest level in 5 years.

North American investors have been most actively de-risking portfolios.

Markets currently face a wall of worry.

The October reading of the investor confidence index from State Street dropped -3.4pts to 84.4 - the lowest reading since late 2012. Across the regions, North American institutional investor confidence dropped -2.6pts to 81.8, and the European index dropped -10pts, while the Asian index was almost unchanged, just off -0.3pts.

The global institutional investor confidence index had been declining since the peak this year in April, and dropped below 100 in August - so arguably it provided an advance warning to the global market correction which has intensified since the US 'joined the party' in October. Clearly the larger investors are voting with their feet in terms of how they see things playing out from here...

From State Street - the Investor Confidence Index:

"The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors."

1. Global Institutional Investor Confidence Index: First chart shows the global index - it's an interesting indicator in that it sometimes provides contrarian signals, and at the very least provides some context on what the larger investors are doing. So the big question really is whether this is presenting a contrarian/oversold signal at this point... or is a harbinger to a secular turn in the market. (My guess would be the former, but then again we are late in the cycle.)

2. Institutional Investor Confidence - by region: This chart shows the investor confidence indexes by region - notably its North American investors who are pulling in their horns the most... which is interesting given that the American market had been relatively resilient compared to its global peers - so it could just be a case of an overdue shakeout.

3. US Investor Confidence Index vs. the S&P500: Honing in on the North American index, you can see that after buying the dip earlier this year, North American institutional investors have had a change of heart and are actively de-risking as a combination of high valuations, an overheating economy, tighter monetary policy, higher political risk (mid-terms), and headline risk (trade wars, etc), build a wall of worry for markets on the Northern border.

The key for markets from here will be to figure out which of those bricks in the wall of worry are illusions vs. hard facts. I think the reality is that as we move later through the cycle that volatility will be higher, and that also means that if the wall of worry crumbles, then the rebound could end up coming fast and furious (and vice versa!).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.