The Rare Sentiment Signal Pointing to Bigger Stock Gains

Previous signals have resulted in outsized gains for the SPX after the one-month marker

Oct 18, 2017 at 12:57 PM
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The U.S. stock market has been carving out a steady stream of new highs this year, with the Dow most recently slicing through the key 23,000 level, and the S&P 500 Index (SPX) and Nasdaq Composite (IXIC) notching record highs of their own today. And while the University of Michigan's latest consumer sentiment index signaled elevated levels of optimism from consumers, other sentiment indicators are showing there's still plenty of skepticism to be found -- indicating we have still not reached the euphoria that often occurs at a market top.

Specifically, last week's National Association of Investment Managers (NAAIM) survey -- which measures overall equity exposure by active money managers -- fell 13.3 points, or 14.7%, to 77.40, marking the largest week-over-week decline in bullishness among this group since April 19, according to Schaeffer's Quantitative Analyst Chris Prybal. Widening the scope to include two weeks' worth of data, the reading dropped 18.6 points, or 19.4%.

naaim sentiment index since 2015

Diving deeper, Prybal noted there have been just 42 other times since January 2007 that the NAAIM survey has retreated more than 18 points in a two-week time span -- what we'll call a signal. This most recent occurrence was the first since March 15, and prior to that, you'd have to go all the way back to Oct. 26, 2016. While there have just been two other signals this year, 2007 and 2008 hold the records for most frequent occurrences, with six apiece.

spx returns with naaim

So, what does this mean for stocks going forward? Using data since 2006, the S&P 500 Index (SPX) has tended to underperform in the near term, averaging a five-day post-signal loss of 0.3% versus an at-anytime gain of 0.2%. Widening the time frame to the one-, two- and three-month markers, however, tells a different story -- most notably at the two months (42 days). Here, the SPX has averaged a gain of 2.3% after a signal, compared to a more modest anytime return of 1.2%.

spx returns since july 2006



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