What Soured NAAIM Sentiment Could Mean for the Market

The NAAIM Exposure Index's 10-week moving average dipped below 40% for just the fifth time since 2008

by Alex Eppstein

Published on Sep 25, 2015 at 10:28 AM

The stock market has been extremely volatile over the past month, with most of the action to the downside. So, how is this impacting sentiment among institutional investors? As you might've guessed, it's forcing them to the sidelines.

Specifically, the latest National Association of Active Investment Managers (NAAIM) Exposure Index number came in at 21.3 -- roughly 10 points below where it was one week ago. This is also the 10th time the reading has dropped at least 10 points, week-over-week, in 2015. To put that number further in perspective, a response of 100 indicates an active money manager is full invested, while a negative 100 reading indicates one is fully short. The average NAAIM number since 2012 is 70.8 -- quite a bit higher than where it is now.

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Also worth noting, the 10-week moving average for the NAAIM reading is 38.7%. As you can tell on the chart above, that's the lowest level since December 2011. This is a relatively rare occurrence, too. In fact, since 2008, the 10-week moving average has registered south of 40% just five times.

With the help of Schaeffer's Quantitative Analyst Chris Prybal, I decided to look at what that rare signal could mean for the S&P 500 Index (SPX) and CBOE Volatility Index (VIX). As you can see below, SPX returns tend to be quite bad -- averaging a 10-day post-signal loss of 0.8% versus an anytime return of 0.2%. Going out to 63 days (roughly three months), the average loss hits 3.6% -- exacerbated by a brutal stretch following the July 2008 signal -- compared to an anytime return of 1.8%.

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Meanwhile, VIX returns tend to be higher than usual after the NAAIM 10-week moving average breaches 40%. The average 10-day and 63-day returns are 1.5% and 25.8%, respectively, versus anytime returns of 1.7% and 5.1%.

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