Manager Survey Flashes Warning Sign

There’s one piece of market-related data that I check faithfully – and I believe all serious investors should do the same.

It’s the monthly survey of fund managers from around the world, conducted by Bank of America Merrill Lynch.

The latest survey includes 201 fund managers with a total of $576 billion worth of assets under management, and it tracks where these big money managers are investing their money.

Rather than following the fund managers into crowded investments, though, I use the survey as a contrarian indicator.

Think about it: If all of these managers are piling into certain trades and out of others, I want to position myself the opposite way. In fact, Bank of America itself uses the survey as a contrarian indicator, which I’ll explain later.

Latest Survey Shows Very Crowded Trades

My years in the investment industry taught me that job preservation is one of the strongest instincts on Wall Street – and it leads to herd behavior.

You see, fund managers who are positioned similarly to their peers have relative job security, even if the market tanks, and even if people who owned their fund lost a bundle.

Thus, my radar went off after I read the latest Bank of America survey. Fund managers all seem to be piling into the same trades once again. Think of a small canoe in which everyone has piled into one end of the boat.

Here’s the breakdown of their consensus trades, as revealed by the survey:

Bank of America said the most vulnerable tactical trade heading into the expected December Fed rate hike is long dollar and the associated trades (short commodities, emerging markets, etc.).