Are Those With $666 Billion AUM Wrongly Positioned Again?

There were technical signs on January 6^th after the release of the December Job report that the strong rally “was something different” . That was despite the gloom and doom outlook from many Wall Street strategists.

A majority of professional analysts have been fighting the market rally since the start of the year. The skepticism has been supported by the stock market’s choppy upward path as there have been several sharp downdrafts that have helped keep investor sentiment low.

In the latest survey from the American Association of Individual Investors (AAII), only 22.9% expect the S&P 500 to be higher in six months. In 2023 there have only been four readings above 30% with the peak reading of 37.5% just before the February correction. The long-term bullish average is 37.5%.

From last week’s survey, 39.7% were bearish with 37.4% neutral. Both of these readings are above the long-term average.

It has been my view since the growth value ratio bottomed in January (see chart) that a growth-led rally would take the S&P 500 to the 4200 level and likely higher.

Over the past two months, this view has been further supported by the April data that large speculators had accumulated a historic short position in the S&P futures. As reported by Bloomberg, large speculators had the largest short position in the E-mini S&P 500 futures since November 2011. That was just a few months after the downgrade of US debt and a Zweig Breadth Thrust buy signal.

Frankly, I have been looking for a short squeeze since April but the most current data indicates that the short position is still quite high. This could be changing as on Friday the S&P 500 had a high of 4212.9, line b, but then closed at 4191.98. The failure to close strongly above 4200 has likely kept some from covering their shorts.

It will likely take a sustained move above 4200 or 4250 before they get nervous. The August high at 4325 is a more significant resistance level.

The technical readings have not been strong enough yet to indicate upward acceleration. For the week the NYSE A/D numbers were positive with 1814 advancing issues and 1320 declining. The daily S&P 500 Advance /Decline moved above its MA on Thursday but closed back below it on Friday.

A move above the early May and then the August high, line c, is needed to confirm a major push to the upside. This is still the favored scenario but for now, the daily S&P as well as the NYSE A/D lines are still in short-term downtrends. For the S&P the key support is at the uptrend, line d, and then the March low.

The technical outlook for the NYSE Composite and Dow Jones Industrial Average has been the weakest so far this year as indicated by the performance chart. They are up just 0.92% and 1.4% respectively YTD. This is consistent with the growth/value trends analysis that has favored growth all year. The Nasdaq 100 is up 26.2% YTD with the SPY
PY

SPY
up 7.1%.

In a review of the October 2022 BofA’s survey of large money managers the Bank of America
BAC
investment strategist Michael Hartnett commented “Sentiment [is] still uber-bearish,” pointing to high levels of cash, the lowest allocation to tech stocks since 2006. A closer reading of the report shows they were also overweight in energy which was a value play.

In the latest survey of 251 participants with $666 billion under management reveals they are still very bearish but now are overweight technology shares. They had “ the biggest two-month increase since the global financial crisis and being long big tech is the most crowded trade”.

Also “Investors are the longest growth versus value stocks since July 2020.” This is pretty much the opposite of what they thought in October 2022.

The Invesco QQQ
QQQ
Trust (QQQ) gained twice as much last week as the Spyder Trust (SPY) and closed above its daily starc+ band. The weekly chart also looks much stronger as the resistance going back to the start of the year, line a, was overcome. The close was also above the 50% retracement resistance from the late 2021 high at $331.36 with the 61.8% resistance at $349.61.

The weekly Nasdaq 100 Advance/Decline line has been above its WMA since March and rose further last week. In addition, the daily Nasdaq 100 A/D line was able to break out above the downtrend I pointed out last week (see chart).

Over the years I have found the BofA’s survey to be very informative and can often be a good contrary indicator if you use your own timing indicators. For example, the survey was extremely bullish on crude oil in May 2022 but crude peaked at $123 in June as it gave a weekly doji sell signal at the highs.

I think there is a chance that the recent heavy tech buying and liquidation in the value stocks is likely to result in a swing back in favor of value as we head into the summer. Another of the most crowded trades from the latest survey was short banks.

There are no signs yet of a top in tech or a bottom in value stocks but there is some FOMO in tech which often is an early warning of a top.