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Assets Shift But No `All Clear' to Buy Dip, BofA Survey Says

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JPMorgan's Macklow-Smith Says Selloff Could Be an Opportunity

As the stock market swooned last week, asset allocators bent but didn’t capitulate. 

Fund managers reported cutting their weightings of both equities and bonds and accumulating the biggest net overweight cash position since the 2016 U.S. election, but the cuts didn’t amount to a complete rout, according to the Bank of America Merrill Lynch February fund-manager survey released Tuesday. Bond allocations were cut to the lowest levels since 1998.

“While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear to buy the dip,” according to chief investment strategist Michael Hartnett. 

The survey was conducted Feb. 2 to 8, the last day of which the S&P 500 closed at its lowest level of 2018, and during a period that saw the Cboe Volatility Index rise above 50. The benchmark equity gauge bounced off its 200-day moving average the next session -- so at least some fund managers (or their computers) gave the green light to try to catch what must have looked like a falling knife.

Notably, 70 percent of respondents now say they believe the global economy is in a “late cycle” stage -- the highest share since January 2008.

Bank of America Merrill Lynch

Participants reported a record one-month jump in net percentage of investors indicating they have taken out protection against a sharp fall in equity markets in the next three months, at net minus 30 percent in February from net minus 50 percent in January. Only a net 43 percent of those queried said they are overweight equities, a 12 percentage point drop from the previous reading, with Hartnett saying that a monthly 16 percentage point drop in allocation is required to signal completion of a risk-asset rout, based on the survey’s history.

The bank’s January report proved eerily prophetic: “Short vol” was flagged as the most crowded trade for the first time, with Hartnett writing that the exuberance of equity buyers made a “vol spike imminent.”

The most crowded trades this time? Long FAANG plus BAT was top with 26 percent, and short-U.S. dollar second with 20 percent. Short volatility ranked third, with 18 percent of responses.

— With assistance by Tracy Alloway

(Updates with bond holdings in second paragraph.)
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