Fund Manager’s Survey
We’ve looked at some of the results from the BAML fund manager’s survey in a previous article. Let’s look at some more results to help us forecast where asset prices are going. The chart below shows the z scores of a few assets. When the z score is high, it is overbought and when the z score is low, it’s oversold. As you can see, the banks have a z score near 2 which shows us that they will likely sell off in the coming weeks. I’m guessing this survey was done a couple weeks ago because there was a selloff in the first week of November in the KRE regional bank index as it fell 6.05% from its late October high. In the past few days it has increased, so now it’s down 3.8% from the high. Therefore, in the short term it makes sense to avoid them based on this data. Equities have a z score of below 1 which is surprisingly given the massive global rally. The U.K is extremely oversold, which could mean it could be in for a quick bounce back.
One of the reasons the bank stocks are rallying so much is because of the net interest income they are earning. Net interest margins increase when the Fed raises rates. The Fed is about to raise rates 3 times this year which is a big boost to their bottom lines. The chart below shows the percent change in net interest income. Since rates were so low last year, the percent change is about 8% higher. I’m expecting another 2 hikes in 2018. The fact that banks are rallying might be because the consensus on rate hikes is increasing to 3 or 4.
The chart below paints a more bearish picture of global equities as the light blue bars show the November allocation increased to 49% overweight. As you can see from the black dotted line, there has been very few times when the fund managers had a higher allocation to stocks. This is a ceiling for stocks that they will have a tough time breaking through. This isn’t shocking as it’s tough to repeat a year where almost every country saw its stock market rise. The black line is the most disconcerting. It shows the global equity performance compared to the generic basket which holds 60% stocks, 30% bonds, and 10% cash. Fund managers are very underweight bonds and very overweight stocks. This could mean a sharp sell-off in stocks is coming soon.
