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A sentimental embrace of risk

Wednesday, October 19, 2016 13:45
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Mid-week market update: When traders refer to “institutions” in the context of sentiment analysis, often the impression is that institutions represent some monolithic entity. Nothing could be further from the truth. I tend to analyze institutional sentiment by segmenting them into four distinct groups, each with their own data sources:

  • US institutions, whose sentiment can be measured by Barron’s semi-annual Big Money Poll
  • Foreign and global institutions, as measured by the BAML Fund Manager Survey (FMS), which is conducted on a monthly basis;
  • RIAs, as measured by the NAAIM survey, conducted weekly; and
  • Hedge funds, as measured by option data and the CFTC futures Commitment of Traders data, though hedge funds are partly represented in the BAML FMS sample.

Each group is different and they can behave differently. The first three tend to represent slow but big money, while hedge funds represent the fast and high turnover money.

The differing groups of institutions don’t always agree. Today, however, the US and global institutions all seem to have formed similar views. Institutional investors are bearish on bonds and they are becoming increasingly bullish on stocks, based on a belief that growth is improving.

Under these circumstances, the key question for traders and investors is whether they should jump on bullish equity bandwagon or be contrarian and fade the institutional purchases.

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