This Rare Signal Could Be Bullish for Stocks

The S&P 500 Index (SPX) has tended to outperform after weekly spikes of 25% or more in the NAAIM reading

Apr 19, 2017 at 11:29 AM
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In the latest National Association of Active Investment Managers (NAAIM) survey, active money managers increased their overall exposure to stocks by the biggest percentage margin since Nov. 9. Specifically, the NAAIM reading jumped 28.5% week-over-week to 86.70 from 67.47 -- its lowest point since the week prior to the U.S. presidential election. This only echoes the Conference Board's late-March consumer confidence reading, which suggested Americans are more optimistic toward the stock market than they've been since 2000.

What's more, Schaeffer's Quantitative Analyst Chris Prybal ran the numbers to see how the S&P 500 Index (SPX) has tended to perform after such large increases in the weekly NAAIM reading. He found 26 other times this reading has spiked 25% or more, looking back to 2010. After each occurrence, the SPX has averaged stronger-than-average gains across all near-term time frames. Plus, at the two-month mark, the S&P has been higher 81% of the time post-signal, versus a 72% anytime return.

spx returns since 2010

spx return after naaim weekly spike

While this growing optimism toward stocks is seen in the weekly Investors Intelligence (II) poll, as well, the results from the American Association of Individual Investors (AAII) survey is showing more skepticism among investors. This outlook is echoed by a recent BofA-Merrill Lynch note, which showed traders moved money into European assets and out of U.S. equities at one of the fastest rates since 1999 -- a trend that was also seen in emerging markets, according to the brokerage firm.

Amid the diverging sentiment polls and a stock market that has cooled its heels since topping out at record highs in early March, options traders have been growing restless. Just yesterday, one SPDR S&P 500 ETF Trust (SPY) options traders paid $1.35 million to hedge against any additional near-term headwinds, though Schaeffer's Senior V.P. of Research Todd Salamone said in this week's Monday Morning Outlook that the SPX could find support at 2,324 -- home to the index's round $20 billion market cap -- in the coming days.

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