Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
It’s that time of year again, dear reader. Twice per year, Barron’s does a survey of large professional money managers to get their outlook for the market (see ” Reason to Cheer “).
I get a lot of value out of reading the survey results, but not necessarily for the reasons you might think. This is a topic I first covered for MarketWatch late in 2011 (see ” Big Money Looks Bullish “).
It generally pays to invest with the Big Money. After all, these are some of the best and brightest minds in the business, and they have the ability to move the market. But even professionals can succumb to herding behavior at times. When it appears that “everyone” is on the same side of a trade, surveys like these can be useful for crafting contrarian bets. Ideally, you like to see a general consensus among the Big Money but not quite unanimity.
So what says the Big Money today?
They are more bullish than they were six months ago, which makes sense when you consider that the survey was done before April’s volatility put a damper on the first-quarter rally. Some 55% of those surveyed were “bullish” or “very bullish” about the market’s prospects through June 2013. Also, 31% were “neutral,” and only 14% were “bearish” or “very bearish.” This is the sort of bullish consensus I like to see; the Big Money is optimistic without being euphoric.
Sentiment toward other asset classes tells a very different story, however. When it comes to U.S. Treasuries, 81% of the investors surveyed were bearish, 17% were neutral, and only 2% were bullish.
Normally, skewed sentiment like that would get my pulse racing, and I would be tempted to take the other side of that bet. Two percent bullishness would suggest that there is “no one left to sell,” in trader’s parlance. Unfortunately, with Treasury yields what they are, there is simply not enough upside potential to make the trade worthwhile. Even if the 10-year note were to fall in yield from its current 1.96% to something along the lines of 1.50%, this would not be a particularly profitable trade unless you used reckless amounts of leverage. Some trades are best left alone.
Bullishness is surprisingly high for Latin American stocks, at 53%. Some 39% of those surveyed are neutral on the region, and only 8% are outright bearish. Interestingly, the Big Money is not particularly pessimistic on Europe, despite Spain’s recent travails: 56% were neutral on the region, and 27% and 17% were bullish and bearish, respectively.
It would appear that the Big Money agree with Sizemore Capital’s view that the attractive valuations on offer in Europe more or less compensate investors for the short-term risks they face in investing there (Sizemore Capital has a large allocation to Europe in its Tactical ETF Portfolio ).
Returning to the U.S. market, the Big Money appears to be a bit torn with respect to Apple (AAPL) . Apple made the “favorite” list, but was also ranked as one of the eight most overvalued stocks. Go figure.
At the sector level, I see some evidence of mild herding (see chart ). Technology, presumably led by Apple, was picked as the best performer for the next six to 12 months by 31% of respondents and as the worst by none. Meanwhile, utilities were picked as the worst performer by 30% and as the best by only 3%.
During last year’s volatile second and third quarters, the utilities sector performed extraordinarily well relative to the rest of the market. Given the low expectations for the sector, could another solid run be a possibility?
Given investor hunger for yield these days, utilities could easily enjoy a nice run in an otherwise choppy market. Investors wishing to test this theory can buy shares of the Utilities Select SPDR (XLU). It yields a handsome 4% in dividends and should provide some measure of protection should the market experience another wave of volatility.
