Wall St Week Ahead: Less cash, fewer bears could leave U.S. stocks vulnerable

Several indicators that pointed to upside for U.S. stocks this year have shifted to a more neutral outlook, potentially leaving equities vulnerable to turbulence from a recent surge in bond yields and worries over China’s economy, investors said.

Some investors watch so-called contrarian indicators to gauge the market’s mood, with extreme pessimism thought to be a good sign to buy and vice versa. At the start of the year, measures such as stock positioning and allocations to cash showed extreme bearishness, reflecting investors’ grim outlook following a brutal selloff in 2022 and expectations of a recession in the second half of this year.

But signs of a resilient economy and cooling inflation drew investors off the sidelines and bolstered risk appetite in the months that followed, fueling a nearly 14% rise in the S&P 500 this year. The upshot, some believe, is that there is now less cash on the sidelines to drive further gains and fewer skeptical investors to win over.

While bearish positioning was a “strong tailwind” for risk assets in the first half of 2023, that’s “not the case” in the second half, strategists at BofA Global Research wrote in a report earlier this week.

The bank’s survey of fund managers showed cash allocations dropped to 4.8% in August, the lowest level in 21 months. That shifted its “cash rule” indicator – which stands at “buy” when allocations are above 5%, to “neutral.” The survey also showed fund managers the least bearish since February 2022.

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