Wall St Week Ahead Less cash, fewer bears could leave U.S. stocks vulnerable

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Several indicators that pointed to upside for U.S. stocks this year have shifted to a more neutral outlook, potentially leaving equities vulnerable to turbulence from a recent surge in bond yields and worries over China’s economy, investors said.

Some investors watch so-called contrarian indicators to gauge the market's mood, with extreme pessimism thought to be a good sign to buy and vice versa. At the start of the year, measures such as stock positioning and allocations to cash showed extreme bearishness, reflecting investors' grim outlook following a brutal selloff in 2022 and expectations of a recession in the second half of this year.

The bank’s survey of fund managers showed cash allocations dropped to 4.8% in August, the lowest level in 21 months. That shifted its “cash rule” indicator - which stands at “buy” when allocations are above 5%, to “neutral.” The survey also showed fund managers the least bearish since February 2022. Investors are looking ahead to the Federal Reserve's annual symposium in Jackson Hole, Wyoming, at the end of next week for further insight into how long the central bank intends to leave rates around current levels.The surge of optimism that helped fuel stocks is being tested this month, though it remains to be seen whether investors will see the declines as an opportunity to buy on the cheap or a signal to lighten up on stocks.

She expects stocks to remain volatile until companies start announcing third-quarter earnings in October. Should the market stabilize, investors will likely reallocate more cash to stocks later in the year, she said.

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