Friday, July 25, 2014

Four trade suggestions from the BoAML Fund Manager Survey

I have been meaning to write about this, but other more important things seemed to get in the way. The latest BoAML Fund Manager Survey shows managers to be well overweight risk and equities (via The Telegraph):
Bank of America’s monthly survey of world fund-managers shows that investors have their second highest allocation to stock markets in thirteen years at 61pc. It is lead by shares in technology, energy, and even banks, and is stretched to a net 35pc overweight in Europe. “The summer 'melt-up' is likely to be followed by an autumn correction,” it said.

Four contrarian trades
Further, the report suggested four contrarian trades that appeared somewhat intriguing:
Bank of America recommends four contrarian trades (for the brave only of course, nor for Welsh widows) based on herding effects. Go long bonds, and short equities; long the US dollar/ short sterling; long telecoms (the most reviled equity group), and short energy; and long emerging markets/short Eurozone.
When I consider contrarian "value" trades, I prefer to look for entry points where there is not only "value", but a positive catalyst that propels the trade in the right direction. When I evaluate the four from a technical perspective, I find one to be in that category, two that appear to be nearing a trade setup and one in a wait-and-see mode.

The first chart shows the long EM and short eurozone equity pair trade. Note how EM equities have bottomed out and begun a relative rally against eurozone equities - that is the positive catalyst that I like to see.

The second and third are intriguing trade setups, but I am not quite ready to pull the trigger yet. Here is the long bond-short US equity pair chart below. Long Treasuries have broken out of a relative downtrend against US equities and they appear to be undergoing a sideways relative consolidation period. This is somewhat intriguing given the sentiment background, but I would wait until a relative breakout by bonds before making a significant commitment to this position.

Similarly, the long Telecom-short Energy pair shows a similar pattern of rallying through a relative downtrend. While there may be some tactical short-term upside, these pairs typically undergoing a sideways consolidation period before staging a relative upside breakout.

The last is the long USD-short GBP pair. Here is the chart of Sterling. GBP is still in an uptrend. At the very least, wait for the break through the trend-line before shorting Sterling.

In conclusion, sentiment analysis can uncover intriguing trades based on crowded long or short positions. Combining sentiment analysis with inter-market technical analysis is another way to see the progression of how the trade may be setting up and can be useful in timing entry and exit points.

1 comment:

Anonymous said...

Regarding the ongoing rally in the Brazilian stock market I can tell you that it is exclusively due to the prospect of opposition victory. The current government has been a disaster and the scenario, even with the victory of the opposition, it's terrible due to the imbalances that are very large. If left wing government beats the opposition the stock market will collapse. In the first round Dilma´s victory is for sure. For now the current president leads the polls, but her rejection rate is so high that the market has pricing a bit over 50% chance to the opposition´s victory in the second round. Remember that the polls still show chance of second round of only 50%, below the market expectation. KB.