The stock market will continue to rise until those two things happen, says Bank of America

• According to Bank of America, the stock market should continue to rise as investor positioning remains muted.

• The bank stressed that while active managers say in surveys that they are optimistic about stocks, their portfolios do not reflect this view.

• According to BofA, stocks could continue their current bull market until those two things happen.

Hedge funds say one thing but do another, and that suggests it Bank of America Savita Subramanian there There is more upside potential in the stock market until two things happen.

In a note on Friday, she emphasized this Investor Sentiment Surveys have shown a noticeable increase in bullish reactions in recent months as the stock market rose. However, portfolio positioning data from active investment managers did not reflect the increasing bullishness.

“Investor surveys suggest that bearish sentiment about risky assets, economic growth and stock returns is easing from now on. But the inventory data from hedge funds and long-only funds still betray deeply conservative biases,” Subramanian said.

For example, the bank’s most recent fund manager survey found utilities stocks to be the least overweight sector, but data on hedge fund holdings shows a 20% net long position in utilities, which is near a record high.

“The BofA Fund Manager Survey and our Institutional Factor Survey are at odds with the latest stocks (and have been for some time),” Subramanian said. “Fund manager survey: It’s getting warmer. Holdings: still extremely defensive… Despite easing recession fears, active equity exposure remains significantly underperforming in cyclical vs. defensive sectors and high-beta stocks.”

Subramanian said the hedge funds’ bearish positioning comes at a time when investors in the stock market should play more offensive than defensive strategies. That means the 5% sell-off in shares this month is likely a buying opportunity.

Subramanian said investors should stay with cyclical stocks, referring to companies that track business cycles fairly closely, such as consumer discretionary and technology stocks, and are not defensively positioned for a recession, such as healthcare and technology stocks utility sector.

The story goes on

But their optimistic outlook for stocks could fall apart pretty quickly if two things happen:

One possibility is that hedge funds will do as they say and significantly increase their exposure to cyclical and high-beta stocks and move away from defensive assets.

Such bullish changes can be viewed as contrarian indicators signaling imminent weakness.

Second, if the macro economy deteriorates significantly, “to the point that the current defensive bias of low-beta fund managers is warranted,” Subramanian said.

“Until a combination of these two things happens, we think the pain trade is higher in cyclical sectors and higher beta stocks. Today’s macro data, including the latest global earnings revision rate and our US government model, tells us now is the right time to “attack, not defend,” Subramanian said.

Check out the original article Business Insider