Record demand for US shares triggers ‘sell’ signal
Investors have never been so positive on the US market, but this could be a warning sign, writes Sam Benstead.
18th December 2024 11:29
by Sam Benstead from interactive investor
In the first fund manager survey from Bank of America since the election of Donald Trump, investors showed that they are extremely bullish on US shares.
The survey of professional investors with $518 billion (£410 billion) in assets showed “super-bullish sentiment” with a record low allocation to cash and a record high allocation to American shares.
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This was driven by optimism that incoming president Donald Trump would boost growth in the US and lead to an increase in profits for companies, as well as lower interest rates next year.
The S&P 500 has risen nearly 30% this year and the tech-heavy Nasdaq index is up 33%.
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With US shares at 70% of global indices, there was also a big jump in allocations to global shares. Meanwhile, investors moved away from European stocks and commodities.
But this positive sentiment towards US shares could be taken as a warning sign, according to Bank of America.
It said that the only times that the cash allocation was this low signalled the top in the market for risk assets, in early 2002 and early 2011.
Its “cash rule” says that when cash balances drop below 4% (they are 3.9% today), then it is a contrarian “sell” signal.
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The bank notes that investors wishing to bet against the crowd could look to buy commodities, European shares and emerging market shares.
It adds: “Since 2011, there have been 12 prior sell signals, which saw global equity returns of -2.4% in the one month after and -0.7% in the three months after the sell signal was triggered.”
The “Magnificent Seven” is the most crowded trade for the 21st consecutive month. However, investors are betting that the Russell 2000 index of smaller American companies will be the best-performing market next year, followed by Nasdaq shares.
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