Investors are in a "bullish holding pattern," according to the March BofA Merrill Lynch fund manager survey.
Although macro conditions continue to trend higher, the survey found that investors had already begun to deploy cash. True, cash levels dropped to 4.8% in March from 4.9% in February, but the levels were still higher than the 10-year average of 4.5%.
The FMS cash rule, thus, is still in "buy" territory, BofA said, noting that average cash balances above 4.5% generate a contrarian buy signal and those below 3.5% a contrarian sell signal.
"Investor positioning argues for a risk rally pause in March/April, with allocation to equities at a two-year high and bond allocation at a three-year low," Michael Hartnett, Merrill's chief investment strategist, said in a statement.
"Policy is the key catalyst for the Icarus trade to fly higher in the coming months."
An overall total of 200 panelists with $592 billion in assets under management participated in the mid-March survey.
A record net 34% of investors surveyed said equities were overvalued, the most in 17 years. Eighty-one percent identified the U.S. as the most overvalued region.
At the same time, 44% of fund managers said emerging markets were undervalued, and 23% said the same about eurozone equities.
A net 32% of investors also thought the U.S. dollar was overvalued, the highest proportion since June 2006. Long greenback was once again seen as the most crowded trade, cited by 39% of managers polled.
Thirty-six percent of investors pointed to higher interest rates as the catalyst most likely to end the eight-year equities bull market, while 21% said weaker earnings would be the cause.
Fear of protectionism as the likely catalyst fell sharply from 35% in February to 21% in March.
