Michael Hartnet, chief investment strategist at Bank of America Merrill Lynch, does not want his clients to be institutional sheep. Taking a decided statistical look at institutional market opinions in a January 17 report, Trump contrarian trades emerge as for some stock sectors the Trump rally might be coming to an end. In other words, with an inauguration approaching at the end of the week, buy the rumor, sell the fact and act like a Contrarian trader.

2016 Hedge Fund Letters

Contrarian trader
Contrarian trader Double edged sword

Slight hedging occurring in some establishment corners over Trump rally

As the Trump administration increasingly becomes reality, investors are “positioning for stronger growth / inflation under Trump,” but there are nonetheless signs of hedging.

Institutional investors surveyed in BAML’s weekly survey are raising cash levels, currently at 5.1%, a sign of caution. This is up from 4.8% in December and nearly 10% more cash than the ten-year average of 4.5% cash levels.

While these levels are not a “sell signal” warning of a big correction, they might more appropriately indicate a “wobble” is expected at some time.

Watch US Ten Year note yield for short trigger

Embedded in the expectation for stronger growth under Trump is that inflation concern. Market participants are watching closely the yield on the US Ten Year note. They don’t debate the notion that high interest rates would trigger an equity bear market, the issue is at what level does the trigger occur.

Unlike Jeffry Gundlach, who said a move in the Ten Year note above 3% would imperil stocks, in the BAML survey only 16% of respondents said a 3% US Ten Year would bring about a market price adjustment. Most in the survey were optimists, with 53% calculating it would take 4% or higher rates to cause a market slide.

What BAML institutional investors are more concerned about is a trade war / protectionism, at 29% being concerned, which is quickly followed by US policy error under Trump, at 24%. The hot topic of Chinese devaluation is pegged at only a 15% concern, rounding out the top three worries.

Trump Contrarian trader looking to get ahead of market move

With concerns that the Trump rally might be “fully priced” – and certain fund managers looking to get ahead of a trend before it turns – Hartnett and his team cull the survey statistics to look for trends that might be overdone – too popular.

One such trend is the long US dollar trade.

On a fundamental level, three rate hikes and inflation on the horizon might be priced in along with stronger US economic growth – common factors cited in the dollar’s value appreciation. Looking at it from a consensus standpoint, 22% in the survey thinks the dollar estimates have overshot reality.

After the long US dollar, the most crowded trade is short government bonds, which is quickly followed by long high quality and low volatility stocks.

When looking at the most significant drivers of equity prices over the next six months, one factor is noticeably missing. While the rise in stock prices has been primarily attributed to President-elect Donald Trump leading up to his inauguration, in the immediate aftermath he isn’t in the picture when expectations of future rally momentum is considered. Nearly 40% think US Treasury bond yields are going to be the biggest performance driver for stocks. This is followed by the US dollar, European risk premium, Credit spreads and Chinese currency issues.  Higher oil prices have fallen by more than half and are a relatively minor concern.

Post-inauguration the bank recommends contrarian traders would be long staples, emerging markets, UK and European assets, commodities and large-cap growth stocks. They say contrarian thinkers are short the US dollar, banks and small-cap value stocks — all of which have risen significantly since the Trump rally.

Contrarian trader
Contrarian trader