Merrill Sees "A Cautious, Careful Consensus"

Bank of America Merrill Lynch is out with monthly Global Fund Manager Survey today. Last time I looked at the survey was when Merrill saw Buy Signal Close in May, however, today the key conclusions are as follows:

The August consensus: cautious and careful

Our August FMS reveals a consensus that is cautious on global growth and risk. The bearishness of June & July has abated. But few investors hold extreme views or extreme positions right now, so directional signals from the August FMS are limited.

Growth expectations stabilize, trough in China
The collapse in growth expectations in June and July was followed by stabilization
in August. A mere 5% of investors forecast stronger global growth in the next 12 months, but a large 78% majority do not expect another recession. China growth expectations have troughed: the growth diffusion index rises sharply to -19% from -39% last month, which caused commodity exposure to rise.

Risk metrics back in their trading range
In a new question our survey said the two largest "tail risks" are premature fiscal
tightening and US municipal/EU sovereign debt defaults. That said, risk appetite in August has stabilized. The BofA-ML Risk Appetite & Liquidity Index rose to 39, a fraction below the long-term average level. The average investor cash balance fell to 3.8% from 4.4%. But hedge fund net exposure remains near a 4-year low.

Still uw bonds, but raising exposure to commodities
No contrarian "sell signal" for bonds: global asset allocators remain stubbornly underweight bonds (exposure dropped to -23% from -15%) and modestly overweight equities (broadly unchanged at a net 12% ow). Commodity exposure has risen to 9% ow from marginally uw last month.

Out of US/Japan into Europe/UK
Big drop in exposure to US, with a net 14% uw the market, the lowest level since Jan'08. Big drop in exposure to Japan, with a net 27% uw. A net 62% of investors view the Yen as overvalued, the highest reading on record. Big rotation into Europe (+11%) and to UK equities (lowest uw since May '07). GEM remains the most preferred region (+38%) for asset allocators but is not at extreme levels (a net 53% were ow last Nov).

Out of utilities/pharma into banks/industrials August saw rotation into banks, though investors are still uw (-19%), and further rotation into industrials (+12%), financed by lower weightings in pharma (12% ow from 23% last month) and utilities (-27% = least loved sector). Tech remains the most-favoured sector (net 34% ow) despite recent underperformance.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

However, the technical team by Mary Ann Bartels is really worried about a potential head and shoulders top on the S&P500:

A break of 2 July low of 1010 would indicate a much deeper correction is likely ahead of us. Support is 1010-1000 then support is 950.

Click on chart to enlarge, courtesy of BofA Merrill Lynch.

We are miles away from 1010 ...