Wall Street Hasn't Been This Skeptical Since 2016

Several sentiment polls are pointing to a blanket of fear over the stock market

Feb 26, 2018 at 7:31 AM
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Despite stocks scoring their best week in over a year last week, active money managers once again reduced their exposure to the stock market. In fact, the National Association of Active Investment Managers (NAAIM) exposure index fell to its lowest reading since the week prior to the November 2016 election, and has dropped roughly 34% since Jan. 24. However, previous such sharp reductions in equity exposure during the current bull market have been short-term buy signals for S&P 500 Index (SPX) stocks.

Biggest One-Month Drop in NAAIM in Nearly a Year

Specifically, Schaeffer's Quantitative Analyst Chris Prybal looked at times the NAAIM index fell 30% or more in a month, looking at only one signal per month. The last time this happened was nearly a year ago, in March 2017. Prior to that, you'd have to go back to September 2016 for a signal. Since 2009 -- the stock market bottom -- there have been 27 of these signals, with the frequency tapering off after 2011.

SPX NAAIM signals since 2009

S&P Has Outperformed After Sentiment Signals

In a nutshell, the S&P 500 has outperformed in the near-to-intermediate term after previous signals. Two weeks after a steep drop in the NAAIM exposure index, the SPX was up 0.64%, on average, and higher 65% of the time. That's compared to an average anytime two-week gain of 0.52%, with a 63% win rate, looking at data since 2009.

One and two months out, the SPX also sported bigger-than-usual returns of 1.81% and 3.39%, respectively, and was higher more than two-thirds of the time. Three months after an NAAIM signal, the index was up 6.29%, on average -- almost twice its average anytime three-month return of 3.61% -- and higher 81% of the time. Six months later, the SPX was higher 85% of the time after a signal, and up an average of 10.21%, compared to 7.03% anytime.

SPX anytime vs after NAAIM signals since 2009

Blanket of Fear Over Wall Street

In conclusion, the NAAIM data is just the latest evidence that Wall Street is still shaken up from the recent stock market correction. Echoing that, CNN Money's Fear & Greed Index is pointing to "extreme fear," and recently touched its lowest point since early 2016. Likewise, the percentage of self-identified bulls in the latest Investors Intelligence (II) survey fell beneath 50% for the first time since September last week, with 36.9% of II respondents expecting a correction -- the highest in at least a year.

It's clear that sentiment is nowhere near the euphoria found at market tops. Should the equities market continue to pick up steam after the early February pullback, a flood of recently sidelined buyers could add fuel to the proverbial fire.

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