The methodology Credit Suisse used to identify crowding looked at changes in weighting and exposures over time.Getty Images/iStockphoto
You can't beat the crowd if you're part of it.
An investment strategy designed to bet against popular sentiment first needs to be able to identify the consensus.
"Institutional investors – particularly contrarians – often ask us, 'What does everybody love?' and, 'What does everybody hate?'" Credit Suisse analysts said in a report titled Carving Up the Consensus.
The report tries to tap into the dominant trends of the U.S. stock market by examining sentiment and positioning by hedge funds, mutual funds and sell-side analysts.
The overly loved and most-crowded industry groups include large-cap banks, large-cap semiconductors and equipment, and small-cap software and services.
The most-hated and under-owned groups, meanwhile, include large-cap capital goods, small-cap energy, small-cap telecom, small-cap retail and small-cap household products.
"This does add to our intrigue on capital goods, retailing and energy from a contrarian perspective," said the report's authors.
They point out that the bank retains "market weight" recommendations on all of the consensus outcasts.
The methodology Credit Suisse used to identify crowding looked at changes in weighting and exposures over time, for stocks in both the Russell 1000 large-cap index and the Russell 2000 small-cap index.
The exercise found that this year's selloff in large bank stocks has done little to reduce their appeal.
"In spite of 2016's performance woes, and many investors wondering aloud how the group can outperform with interest rates so low, our analysis reveals that a uniformly bullish bias has remained in place for large-cap banks," the report said. "Sentiment on this group has never completely collapsed."
So despite attractive bank valuations, crowding risks reinforce a neutral stance on the group, Credit Suisse said.
Regarding semiconductors, "within large caps, views have turned uniformly positive," the authors wrote, underlining a contrarian sell indicator.
Consensus optimism has persisted "at extreme levels" for small-cap software and services stocks, leading to concerns about a "peak in bullishness," the report said.
Negative sentiment, meanwhile, is prevalent on both the sell-side and the buy-side for a number of small-cap sectors. But bearishness alone is not enough to warrant opportunistic buying.
Sentiment toward small-cap retail may yet decline further, while smaller energy stocks would benefit from more attractive valuations, the report said.
Tim Shufelt