Taking the Pulse of Investor Sentiment Right Now

The IMX is at its highest level ever

Senior Quantitative Analyst
Aug 4, 2021 at 8:00 AM
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Last week, I looked at the Investors Intelligence sentiment survey, which I often reference, and the AAII sentiment survey. This week, I’m sharing some numbers on a couple of other sentiment surveys we look and are referenced in Monday Morning Outlook once in a while. They are sentiment surveys put out by the National Association of Investment Managers (NAAIM) and by TD Ameritrade. I spend a little time on each survey's methodology. It is important to know who is being surveyed and how, as it determines the meaning and potential implications of the survey. Then I show some numbers to see if there's a potential signal that can be generated from the results.

NAAIM Exposure Index

The NAAIM is an organization that consists of investment advisors registered with the SEC who are engaged in active investment management for retail clients. The weekly survey asks them for a number between -200 (leverage short) to +200 (leveraged long) where +100 means fully invested and 0% means their portfolios are in cash or hedged to market neutral. What's relevant is that the survey is based off where their money is invested rather than how they feel about the market. Surveys based on opinions are volatile and change quickly with market direction. Changing the exposure in a portfolio is an action that's more meaningful. This is assuming their answers truthfully represent their portfolios which I have no reason to doubt but since it's a survey there's a chance the results don't align with reality.

We have data from the NAAIM Exposure Index going back to mid-2006. The recent reading is hard to see in the chart but it's just below 80. This means, on average, the investment managers are heavily exposed to stocks but nothing atypical. In fact, looking back 52 weeks, I found where the reading was relative to its highest and lowest reading and it's below the 50% level meaning it's closer to its lowest reading than highest. To me, investment managers are not nearly as optimistic as what I would expect.

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Based on above, I looked at previous instances when the NAAIM reading, relative to its 52-week high and low was less than 50% while the S&P 500 Index (SPX) was at its highest reading over the past 52 weeks. The table below summarizes how the S&P 500 performed after the eight other occurrences. The returns, especially in the shorter term, are abysmal. Three months after these occurrences, the index averaged a loss of more than 3% and was positive just three times. The six and 12 month returns underperform typical returns since the first signal which was in 2013.

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For those curious, here is a table of those individual signals. There was a signal as recent as a couple months ago. The last signal before that occurred just before the Covid crash in February of 2020.

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TD Ameritrade IMX Index 

TD Ameritrade puts out their Investor Movement Index (IMX) on a monthly basis. The IMX is based off actual brokerage accounts by retail traders. This seems like a very good measure of sentiment amongst the retail crowd as it tracks stocks that they're buying and selling rather than a survey on how they're feeling. Unlike investment managers, these retail traders are showing extreme optimism. The IMX reading clocked in above 9 for the first time ever in the most recent report. Note that the most recent report we have is from the end of June. The S&P 500 is up another 3% since then so it wouldn't be surprising for another increase in the IMX.

Since we're at a never-before-seen level in the index and there's just monthly data points, any signal would show just a handful of data points at most. Therefore, I'll just give my subjective reading of the chart and interpretation.

As a contrarian, it's always concerning when retail investors get extremely bullish. Some optimism is expected when stocks continue to hit all-time highs, however, so perhaps we can take comfort in that. To assuage our fears, we would like to see any small pullback in stocks result in an outsized move lower in the IMX reading. This would indicate some jitters amongst the retail traders. Unfortunately, the graph now looks a little like the end of 2017 in which the IMX spiked to all-time highs along with the S&P 500. The next year, 2018, saw the index fall by 6%. Another bearish interpretation would be to contrast this survey with the NAAIM Index we talked about above. The investment managers could be viewed as more experienced investors, or as the smart money. It's a bad sign when the smart money index is nowhere near an extreme, but the dumb money retail index is going parabolic.

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