Managers may feel virtually "forced" to jump into the market if it continues to rise.
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Readers might recall that back in March (See: Is a Countertrend Rally Inevitable?), I mentioned that the countertrend rally I was expecting would be focused on out-of-favor, economically sensitive sectors such as financials, materials, consumer cyclicals and energy. I predicted that the strength of the moves in these sectors would be based not only on upside economic surprises, but the fact that portfolio managers were way underweight these sectors and would have to scramble to get their weightings in these sectors up in order to avoid drastic underperformance.
In this context, it was very interesting for me to note Bespoke’s report today showing the latest breakdown of institutional weightings. The report shows that today, institutions are overweight financials, materials, consumer cyclicals, energy, and industrials -- all economically sensitive.
Funny, isn’t it, that these sectors have all of the sudden become so popular after massively outperforming the market last quarter.
Now, take a look at consumer staples, utilities, healthcare and telecom -- all underweight. Remember when, in March, all the financial pundits were telling us that we needed to be long the defensive, high-dividend-yield stocks to ride out the bear market?
Well, all of those sectors massively underperformed. Now nobody wants them.
I think that this about-face in institutional sector allocations is as classic a contrary indicator as one can get -- and one with very important economic and financial markets implications: With institutions massively overweight economically sensitive sectors, how many further surprises can we expect on the economic front?
On a side note, I was heartened to see that technology is the second most underweighted sector. I am most bullish on this sector myself.
Now, with all of that being said, remember, that even if we are in the last stage of this bull market, this last stage could be worth another 10%-20%. One must be careful.
Look at the 2-year chart of the S&P 500 if you need more convincing. Above 1,010, the path to 1,200 is clear.
Thus, I am currently neutral. However, I will become constructive with closes above the 1,010 area. I will only get progressively more bearish with closes below 1,000, 990 and 980 areas.
On a final note, the disappointing news on retail sales (see XTR, ANF, WMT, GPS) should have caused a major sell-off. It was ignored. The news on the surge in foreclosures should have caused a downside bias in the market. Instead, the market bought the banking sector (see BAC, RF),which is the most heavily exposed to these foreclosures.
The lesson? Respect momentum. Respect the cash out there. And respect the situation I have continually alluded to, in which managers may feel virtually “forced” to jump into the market if it continues to rise.
No positions in stocks mentioned.
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