"Raw ingredients for a bear squeeze"

The survey is a reminder that even in this difficult environment there exist the raw ingredients for an equity ‘bear squeeze’. Cash levels are high; risk appetite is close to the survey lows; and fund managers continue to believe that stocks offer value both in absolute terms and relative to fixed-income assets. The challenge is to find the catalyst, which is hard against a deteriorating macro backdrop and growing talk of recession.

Merrill Lynch has carried out regular fund manager surveys for many years now, run by David Bowers, who (I think) has been doing it since his Smith New Court days, and I've found them to be quite insightful from time to time. The latest survey is a pretty good one (Link here if you have ML research access) especially in the light of the trough indicator "not yet"s I've been posting in the last couple of days. As summarised for me by a Merrill salestrader:

• Asset allocators' cash positions rose to a record high this month. A net 42% of asset allocators reported that they were overweight cash, up from February's record 41%.
• They have turned wary of both bond and equity asset classes, with net underweight positions of 18% and 23% respectively.
• Within equities, they are neutral on US and eurozone stock markets, remain underweight Japanese and UK equities, and stand by their `love affair' with emerging-market equities.
• Investors' global sector exposure continues to favour pharmaceuticals, telecoms and energy at the expense of financials and consumer discretionary.

Now remember that this is a survey of large, well established, institutional and generally pretty smart FUND MANAGERS (pronounced ma-a-a-a-a-anagers like a sheep... from the ba-a-a-a-a-uyside...) so in aggregate it is, almost by definition, the best indicator of market groupthink you are likely to find. Not always wrong, but if you assume they're not lying (it's not a survey of bankers, after all) then you have to assume that their positioning in the market already reflects all the opinions out there and their current best views and projections, and therefore their survey responses should be largely "priced in."

So should the survey results be taken as contrary indicators? Probably not that simple (unfortunately.) I think the way to use it is to find the inflexion points in the aggregate measures and see if the rest of the sheep/ lemmings will continue to follow the pack. (And also if YOU are thinking with the pa-a-a-a-a-ack.) Will try to check it all out more closely tomorrow (Good Friday, with Korea, Taiwan, Malaysia and some other markets still open.)