We continue to find sentiment readings (positive, per AAII) to be incongruent with the feedback we get from hedge funds, asset managers and individual investors. With August/September being seasonally weak periods, hedge funds seem to be looking for short ideas and long-only managers simply do not feel comfortable putting incremental cash to work at new market highs. A final but interesting anecdote, at a large group lunch earlier this week with 80 or so wealth advisors, we heard how most individual investors are spectators in the equity markets, having a greater share of their assets in bonds, particularly munis – apparently, stocks are for “other people” (who want to take the risk).
In our view, sentiment tends to have contrarian implications – that is, if investors are generally (anecdotally) cautious, this suggests that a lot of the negatives are already reflected in current prices. Consequently, as much as investors are concerned about a potential pullback (which we acknowledge is possible), the current caution suggests better implied risk/reward.
As for strategy, Lee says, "We continue to like Cyclicals here, primarily because of the anticipated acceleration in [second half] growth for U.S. and Euro area, as evidenced by the upturn in economic momentum indicators."
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