Sentiment: Bullish Institutions Versus Bearish Individuals

This week's NAAIM Exposure Index was reported at 101, only the fifth time the exposure index has been reported above 100 since the index's inception on July 5, 2006. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers as a group.

Conversely, today individual investor bullish sentiment, reported by the American Association of Individual Investors, fell four percentage points to 31.3%. This is below the long term average of the bullish sentiment reading of 38.5%.

The individual investor sentiment measure is considered a contrarian one as individual investors tend to be the most bullish near market tops and the least bullish near market bottoms. So, if this is the case, and institutions tend to be on the bullish or right side of the allocation debate, are these two readings indicating the market has more room to move to the upside?

Below is a table comparing the prior NAAIM readings above 100, the AAII individual bullish sentiment reading and the subsequent one year return for the S&P 500 Index. Although the number of NAAIM readings is small, the subsequent 12-month return for the S&P 500 Index has averaged a low double digit positive return when NAAIM readings were above 100.

Lastly, the S&P 500 Index has traded within a very tight 1% trading range for the last eleven trading days. From a positive standpoint, markets can correct in price (a steep decline), or over time. This sideways trading range may be one where a correction is occurring over time. The obvious questions is whether the market breaks to the upside or to the downside.

Additional commentary, and an interesting one, highlighted by Ryan Detrick, CMT of LPL Financial, on the market level and whether or not it is in a bubble can be read in an research report, Is the S&P 500 in a Bubble?.