INSTITUTIONS TURN NEUTRAL ON THE RALLY, CONFIDENCE FADES
After buying into the rally late last year, institutions have been selling into the rally since August according to the latest investor confidence survey from State Street. At a reading of 100 institutions are no long allocating capital towards equities and have clearly moved to a more defensive posture since late summer. Investors in Asia have turned decidedly more bearish as institutions reallocate capital from stocks to less risky assets. The reading of 91.2 in the Asia represents a high level of pessimism regarding the recent move in equities. This change in risk tolerance has also been evident in the underperformance of small cap stocks compared to large caps.
The founders of the index, Ken Froot and Paul O’Connell had these comments on this morning’s reading:
“Across all regions, institutional investors are largely treading water; neither increasing nor reducing their aggregate holdings of risky assets,” commented Froot. “However, the aggregate figures mask some country- and region-specific views. This month, for example, institutional investors aggressively pared their holdings in selected markets, such as Australia, while continuing to add to their emerging markets holdings. Overall, investors are displaying some caution about the current level of equity valuations, and a desire to see more evidence of real economic activity and aggregate demand, particularly in the US, before adding to equity exposures.”
“European investors displayed some increased optimism this month, but elsewhere the evidence is that investors are in a consolidating mood,” added O’Connell. “There is an awareness that structural issues such as the US current account deficit, the Asian current account surplus, and the long-run decline of manufacturing employment will need time to be worked out. In the interim, governments continue to support demand, but investors have an eye on both the temporary nature of the stimulus, and its impact on the overall debt burden.”
The big money is becoming skeptical of the rally. Along with the recent increase in insider selling this data becomes difficult to ignore particularly considering their prescience in allocating capital in late 2008 and early 2009.
Looks like following this data over the last year would have banked some serious coin. I hope you’ll keep us updated on this indicator.
Nobody would confuse me with a bull at this point, but if institutions de-allocated starting back in August, how is that bearish today?
Likewise, pessimism in Asia does not scream “top” to my way of thinking.
Insider selling has been hugely negative for many months now. This hardly seems like “news,” let alone confirmation.
Maybe if this graph went back to ~2Q08 it would be more illustrative of the overall point. Laying the S&P500 (or MSCI or whatever) over it could then tell the tale of any relevance to the whole blurb.
TPC Reply:
November 24th, 2009 at 4:31 PM
A move below 100 shows that institutions are no longer allocating capital to stocks. They were still allocating capital in stocks until this month. You might be reading the chart incorrectly.
vsfvsl:
The object of institutions and retail investors is to avoid major losses while still staying in rallies as long as the risk definitely outweighs the reward. Traders live by a different code, they are willing to follow trends longer trying to maximize returns. This of course means that traders are taking on more risk, and more risk means higher potential losses. We all like to point to the famous traders who followed that method and became rich. But the reason that they are famous is because the list is so short.
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