The contrarian buy signals for equities that were triggered in late February are beginning to fade as cash has begun to edge lower this month. Last month was a turbulent one for the world’s markets, although it ended with many assets at about the same level they started at. Many classes plunged early in the month but then staged a huge rally to recover their losses, but now the markets seem unsure about what to do as the high level of volatility.

Contrarian buy signals for stocks triggered by survey

Bank of America Merrill Lynch Chief Investment Strategist Michael Hartnett and his team released the results from the latest edition of their Fund Manager Survey (FMS) on Wednesday. They said that after reaching the highest level since November 2001 last month, cash began to retreat this month, although it still remains higher than the level that triggers a contrarian buy signal, according to the firm’s survey.

The BAML team explained their “FMS Cash Rule” as: “when average cash balance rises above 4.5% a contrarian buy signal is generated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated.”

They said the average cash balance as reported by their survey in February was 5.6%, the highest level in November 2001, but in March, cash levels fell to 5.1%.

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Equities rebound in late February

The BAML called the surge in cash levels last month an “unambiguous buy signal as stocks have soared 11%, high-yield climbed 7%, and oil prices have skyrocketed 31%. Although equity weighting among fund managers remains low, they said risk assets look “toppy as positioning ‘buy signals’ fade.”

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Short EM believed to be most crowded trade

The firm’s survey indicates that fund managers rotated into industrials, energy, materials and emerging markets over the last month while reducing their weighting in staples, cash, Japan and utilities. The survey also suggests that the most crowded trades are a short on emerging markets, a long on the U.S. dollar and a short on oil.

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Global growth expectations rebound

The BAML team also found a sharp increase in global growth expectations, which climbed back to three-month highs as 11% of investors are expecting the economy to grow stronger over the next year. Last month, 16% expected it to weaken.

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They said 48% of investors believe the end of the Fed hiking cycle is the most likely event to end the bull market in the U.S. dollar, while 19% expect negative earnings growth in the U.S. to end it and 9% expect a “big” China devaluation.

Recession worries growing

The debate about a recession continues to rate as BAML found that the percentage of investors who think the global economy is in a late cycle has climbed to its highest level since August 2008 at 59%. The percentage of investors who think the economy is in a recession fell, but so did the percentage who think it’s in an early cycle.

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A U.S. recession is tied with quantitative failure for first place in terms of being seen as the biggest tail risk, although a China devaluation is right on their heals.

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The survey also set a new record for the percentage of investors who think the world’s fiscal policy is obviously too restrictive at 35%, said the BAML team.

buy signals