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Contrarian Alert: Mutual Funds Are Buying This Rally - Should You Sell?
By, Simon Maierhofer
Tuesday July 30, 2013
Most licensed and bonded professionals are considered authorities in their field. Usually you do as they say. Almost the opposite is true for financial pros, mutual fund managers. It often pays to do the opposite of mutual fund managers.

I’m not a craftsman, so if a pipe springs a leak I call a plumber. To get the job done right you call a pro. Unfortunately, the same principle doesn’t always apply to investing.

Often the opinions of the investment pros – mutual fund managers – work better as a contrarian indicator than an actual authority. That’s what makes the recent mutual fund manager survey interesting.
Each week the National Association of Active Investment Managers (NAAIM) surveys money managers to see how aggressively they are positioned, long or short.
The positions can range from leveraged bullish (200% net long) to leveraged bearish (200% net short).  
The average mutual fund manager is currently 87.5% net long, that means that for every $100 under management, $87.5 are invested in stocks. 
That’s not an all-time high, but as the middle portion of the chart below shows, fund managers are not often that bullish.
The chart plots the S&P 500 (SNP: ^GSPC) against two facets of the NAAIM survey. The vertical red lines highlight the correlation between extreme readings and the S&P 500 (NYSEArca: IVV).
Another interesting data point is the ‘last bear standing’ portion of the NAAIM survey. The most bearish manager polled, on average, is leveraged short (negative 110%). The most bearish manager right now is 15% long. 
Rare as those bullish readings are, they are not as bearish for the S&P 500 (NYSEArca: SPY) as we’d expect from a contrarian sentiment indicator.
Some extremes led to corrections (October 2007, April 2010, February 2011), but in other instances (January 2007, September 2009, December 2010, January 2013) stocks just kept on trucking. Although on most occasions eventual corrections erased all or most of the gains accrued since the extremes were registered.
Another indicator that provides a sneak peek at what mutual fund managers are thinking are mutual fund cash levels. Just like a fire needs wood to burn, stocks need cash to rally.
How much cash is left to drive stock prices up further?
The detailed mutual fund cash level analysis featured here provides interesting insight with a twist.
Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter @ iSPYETF.


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