Watch What Investors Do, Not What They Say

You often hear that the best time to be bullish is when other investors are at their most bearish. And that makes sense: when everyone’s already short or out of stocks, there isn’t anyone left to sell. And if short sellers start to close their positions – or even turn into buyers – then prices would be expected to rally to reflect the new dynamic between supply and demand. That’s why extreme bearish positioning is often used as a contrarian bull signal.

The thing is, investors right now are saying they’re bearish, but they’re certainly not positioned like it.

The chart above shows the latest responses to the Bank of America’s Fund Manager Survey. The light blue line shows the percentage of respondents (right-hand axis) who said they are overweight stocks. And it’s sharply negative – as low now as it was during the global financial crisis – suggesting that investors are extremely bearish on stocks.

The dark blue line, meanwhile, shows the actual inflows into stocks (left-hand axis) over the past three months as a percentage of assets under management. The message is clear: investors may have stopped buying stocks aggressively, but they certainly aren’t selling them. In fact, we seem to have just experienced over the past two years the largest inflows into stocks ever. In other words, investors may have never been so bullish on stocks, and remain positioned as such.

There are two important takeaways from this. First, always look at what investors do, not what they say. Second, if investors aren’t as underweight stocks as the market believes, then the “catch-up” trade that people are expecting – with investors having to buy stocks to get back to neutral – might not happen. In fact, should prices start to fall, plenty of investors who’ve said they are bearish might actually start acting like it. Not very bullish for stocks…