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#MoneyBeat Market Ructions Bring Investors Back to Earth

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A month is a long time in financial markets. The main sentiment among investors at the beginning of the year was one of exuberance, but after wild swings in the stock markets, caution is now king.

Fund managers who responded to Bank of America Merrill Lynch’s monthly survey in February are increasingly taking protection against a dive in equities. The net share saying they had done so jumped by 20 percentage points – the biggest one-month leap on record.

It’s quite a reversal. In January, fund managers deemed the most crowded trade to be one that bet on calm markets – known as the “short volatility” trade. Investors also said stocks wouldn’t peak until 2019 or beyond.

Since then, the stock market has been on a rollercoaster ride, puncturing the equanimity of the past year. BAML conducted the survey between Friday Feb. 2 and Feb. 8, a period that saw the Dow Jones Industrial Average and S&P 500 enter correction territory and the Dow swing at least 1,000 points on four separate days.

Many market watchers had warned that the popularity of the short volatility trade meant any spike in the markets could quickly snowball, MoneyBeat noted in January. That turned out to be true as investors scrambled to cover their short positions, pushing Cboe’s Volatility Index higher still. On Feb. 5 the fear gauge lurched up 116%, destroying two exchange-traded products designed to benefit from calm markets.

Nonetheless, that gamble retains a throng of admirers: 18% said it was the most crowded trade in February, albeit down from 28% in January. That was still enough to squeeze into third place, behind investing in American and Chinese tech giants and betting against the dollar.

BAML spotted other signs of anxiety. Managers rotated out of equities and into cash, “reducing risk and cyclicality.” The net share saying they were overweight in stocks fell from 55% to 43%, the largest one-month drop since February 2016, when a New Year selloff in China had just roiled markets around the world. And at 70%, more investors believe the global economy is in the “late cycle” stage than at any time since January 2008.

Michael Hartnett, BAML’s chief investment strategist, advised against buying the dip. “While this month’s survey shows that investors are holding on to more cash and allocating less to equities, neither trait moves the needle enough to give the all clear,” he said.

This story is from WSJ City – fast, fact-packed intelligence from London. Download the app for Apple here and Android here. Switch on notifications under your Settings menu and sign up for newsletters here.

 

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