A Bitcoin token. (Photo: AP)

Bank of American Merrill Lynch’s September fund manager survey found that investors’ average cash balance dipped to 4.8% from 4.9% in August, still above the past 10-year average of 4.5%.

As a result, the fund manager survey cash rule remains in buy territory.

This rule says that when average cash balance rises above 4.5%, a contrarian buy signal is generated for equities; when the cash balance falls below 3.5%, a contrarian sell signal is generated.

The share of investors taking out protection against a correction in equity markets experienced the largest monthly increase in 14 months, up nine percentage points to 73%.

Investors’ optimism over global growth continued its steep slide, sagging to just 25% of survey respondents expecting a stronger economy in the next 12 months, compared with 62% at the beginning of the year.

Fifty-four percent of investors in the poll cited volatility as the most undervalued asset, followed by 15% who said sterling and 10% who cited oil.

Long Bitcoin was considered the most crowded trade in September, cited by 26% of fund managers. It displaced long Nasdaq, cited by 22% of investors, which had been the most crowded trade for four consecutive months. The cryptocurrency was trading near $5,000, up 344% for the year to date.

Short U.S. dollar was the third most crowded trade, mentioned by 21% of investors. As recently as March, long U.S. dollar was the most crowded trade in the survey.

Thirty-four percent of investors said North Korea was the biggest tail risk to markets, way up from 19% who expressed this concern in August. Merrill said this result tallied with a drop in Japan equity exposure in September: net 12% overweight, down from net 20% overweight last month.

A policy mistake by the Federal Reserve/European Central Bank and Chinese credit tightening rounded out the top three tail risks, mentioned by 21% and 15% of respondents.

Net 54% of investors said they would be most surprised to see a recession in the next six months, while net 30% would find an equity bubble to be the least surprising event.

Allocation to U.S. stocks fell to net 28% underweight in September from net 22% underweight last month. According to Merrill, November 2007 was the last time the underweight in U.S. equities was larger.

In contrast, allocation to emerging markets equities rose to net 47% overweight from net 39% overweight in August, while allocation to Eurozone equities fell two percentage points to net 54% overweight.

Merrill said investors had not been so underweight the U.S. relative to emerging markets/Eurozone since 2007. It said a big factor was the weak U.S. dollar.

Net 23% of investors considered the greenback undervalued, the highest level since December 2014.

In a note of caution, Merrill’s European equity strategist Ronan Carr said “overall sentiment on the Eurozone is becoming less euphoric, with headwinds from a strong Euro and investors’ [earnings per share] expectations showing less momentum.”

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