As the persistence of the current bounce becomes apparent, the trembling, crooked fingers of the average asset manager have become increasingly disfigured rendering them unable to pick up their saltine crackers and grape juice as they ponder ways in which to allocate their cash in a comfortable manner. And that right there is the problem or perhaps, the solution, to the current perception of this recent rally. The comfort level in buying this run up on some of the lightest volume we have seen in years is simply not there. It doesn't exist. Leaving asset allocators no choice but to stew in their own rigidity as they await what may never come.
According to the BofA Merrill Lynch fund manager survey released some weeks ago, fund manager cash levels are at two year highs. Nothing Earth shattering in an overly-bearish tone, but still relevant in judging the perception of the current market. When institutions increase cash levels it is because they either 1) believe that equities will become cheaper at some point down the road, allowing them to buy back in over several months OR 2) are unsure in their belief of the equity markets, rendering them unable to make any decisions of consequence as to how assets should be allocated. Cash then becomes the safest bet until the market convinces them otherwise.
In both cases, institutional fund managers will have their hands forced by a market that presses to the upside. This is because institutions do not have the luxury of sitting out rallies in their benchmark based on simple theory. Not after what has transpired in terms of under-performance for the past 5 years paired with an increasing array of options for investors to gain exposure to equities without the need for an asset manager that has under-performed greatly.
In the current circumstance, you can see a market that is intentionally running away from those who are attempting to coax it back into a position that would provide the comfort needed to gain exposure. Each headline that passes with news of an all-time record high in the S&P 500 is similar to a jab to the gut of the fund manager who is neither comfortable, competent nor desirous of exposure to a creature he frankly does not understand.
As averages that have been abhorred as under-performers and dead money in 2014, such as small-caps and growth continue their surge, more pressure will build on those who are under-invested to catch up. Eventually leading to the catch up trade that typically marks short to intermediate term highs in the market.
During the entirety of this exercise in articulate buffoonery, everything from volume to valuations to generic, yellow boxed macro concerns will be cited as evidence of the need for conservatism in the face of record highs in the popular indices. To no avail, however. In the end, the need to have a job trumps theory in any shape or form. And the quickest way to lose a job on Wall Street is to trail behind it. A trait that has become oddly commonplace among far too many.
In essence, fear not, the markets are doing their duty in cajoling future french fry artists and ice cream masons onto the path that destiny has chosen. The difficulty in buying this market is as bullish an element in any as assessing its upside potential. Be confident in that fact.
