This contrarian indicator suggests a pullback in US tech stocks could be on the cards

Photo by Daniel Barry/Getty Images

Bank of America-Merrill Lynch (BAML) released its latest Global Fund Manager Survey (FMS) for June this week, a report that captures the views of over 200 individuals on what’s happening in markets.

They carry some clout, too, managing $US525 billion in funds, meaning it’s a more than useful report for all investors, big or small, contrarian or a trend follower.

The FMS always creates a talking point, crammed full of interesting charts on everything markets.

One chart that always garners a lot of interest is the “most crowded trade”, essentially capturing what trade fund managers believe carries the largest lop-sided positioning.

As such, for a contrarian investor, it’s always of interest.

Here’s the chart for June.

Source: BAML

Being long the Nasdaq Index in the US is currently regarded as being the most crowded trade, with 38% of fund managers nominating it as the most crowded trade, more than double second-placed long US and European corporate bonds at 15%.

After such as stellar run for tech stocks, and with many starting to question current valuations, it helps explain why some believe that a correction, or worse, may be on the cards, especially with many investors already positioned the same way.

However, just because fund managers think positioning is crowded, does it mean that a pullback is likely to follow next?

History provides mixed messages on that front.

This next chart shows the evolution in the most crowded trade in the FMS since

Source: BAML

Prior to “Long Nasdaq” being regarded as the most crowded trade, it was previously being long the US dollar.

Clearly, as a contrarian indicator, it performed well on that front — the US dollar has been slammed recently.

Being short emerging market stocks was also regarded as being a crowded trade in the past, and they too have soared in recent months.

Again, a big tick for contrarians.

However, being long quality stocks was also regarded as being a crowded trade not all that long ago, and they have only continued to go from strength to strength in 2017.

So the FMS doesn’t have a perfect track record recently, but it does provide something of an early warning sign that a pullback in tech stocks could be on the cards.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.