Surveys can weave a telling narrative

It is an axiom of technical analysis that an established trend in financial markets tends to continue – until it definitively reverses.

Identifying those turning points often means interpreting technical data either as confirming or contrarian.

Surveys of investors provide hints about such trends, as investors’ sentiment influences their behaviour in the markets. To interpret a survey correctly, however, readers need to analyse the context in which it takes place. “We look for evidence of spikes in either inflows or outflows, when consensus is overweighted,” says Gary Baker, head of European equities strategy at Bank of America Merrill Lynch Global Research. For instance, investors’ average cash balances can be an indicator of their behaviour and can help a survey reader time their calls on the market. “You can’t pin a call on just that, but they may contribute to expectations of a reversal in subsequent weeks,” Mr Baker observes.

Although regional data is not broad in a global sense, they can still bear a relationship to the behaviour of the market. However, their snapshot may be of mixed value in anticipating future trends. Taking flows in and out of European funds as an example, Ed Moisson, head of UK & cross-border research at Lipper, notes that they often seem linked to past performance numbers, rather than predicting future activity. For instance, Lipper data shows European sales surged in the second quarter of 2011 for bond, equity and mixed asset mutual funds – in advance of stockmarket falls in the summer. Although sales plunged in the third quarter, they had recovered along with the markets by the first quarter of 2012. UK-based funds also traced the performance of the markets.

Several firms offer regular presentations of investors’ views and allocations. Bank of America Merrill Lynch’s (BofAML) fund manager survey is relatively representative of the overall behaviour of the market, thanks to its timely publication and its bank of global and regional respondents managing substantial pools of assets. For example, its May 2012 survey comprised 260 panellists managing a total of $689bn (£441bn) in assets.

Other widely followed data include Lipper’s monthly snapshots, as well as the FT’s quarterly Celsius indicator of sentiment among advisers and, in the UK, the IMA’s monthly statistics. Each adds distinctive flavour. For instance, Celsius reports North America as the “big winner” in its recent quarter, while the latest IMA data highlights fixed income as the best selling asset class for eight consecutive months.

The BofAML survey, published for some 15 years in various guises, suggests some “universal truths”, Mr Baker says. Although individual investors respond to local conditions, the overall figures produce a fairly consistent tone. Moreover, risk and liquidity indices tend to trend smoothly, rather than bounce from month to month. In spite of obvious aversion to risk at present, the current reading is near 30, compared with the average of 40 over the past 125 years. “Headlines are more schizophrenic than investors’ views,” Mr Baker says.