This Signal Went Off for Just the Third Time Ever

The NAAIM exposure index has only topped 100 two other times to date

Karee Venema
Jul 29, 2016 at 10:37 AM
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It's been a record-setting month for U.S. stocks, with all three major indexes notching all-time or annual highs. While stocks have taken a breather this week, amid an onslaught of quarterly earnings reports and uninspiring economic data, the S&P 500 Index (SPX) is only sitting about 10 points below its July 20 record peak of 2,175.63 -- and a rare signal that just went off in the National Association of Active Investment Managers (NAAIM) exposure index suggests more highs could be on the horizon.

The NAAIM sentiment reading jumped to 101.2 on July 27 -- its loftiest perch since late 2013 -- and the third highest reading on record. The peak reading of 104.3 occurred on January 30, 2013, when the SPX reclaimed its footing atop 1,500 for the first time since the financial crisis. The second-highest reading of 101.5 occurred on November 27, 2013, when the SPX topped 1,800 and the Dow Jones Industrial Average (DJIA) made its first foray north of 16,000. As a point of comparison, the average NAAIM reading since its inception is 58.7.

So what does this rare signal mean for the broader equities market going forward? According to Schaeffer's Quantitative Analyst Chris Prybal, while the immediate returns are fairly lackluster, the SPX has historically outperformed when looking at intermediate and longer-term time frames.

Granted the sample size is very small, the S&P 500 has averaged a one-month gain of 1.5% following this signal -- and was positive both times -- compared to an anytime 21-day return since 2013 of 0.9%. Looking out one year, the SPX again was positive both times following the signal, averaging a gain of 16.9%. The anytime return for this time period is a much slimmer 9%, with the S&P 500 positive just 76% of the time.

SPX Returns When NAAIM Topples 100

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