Active Investors Are the Most Bearish Since 2023
When prices fall, investors assume the worst-case scenario is the most likely...
In finance terms, folks "bear up." They begin looking for more problems. And sentiment readings quickly turn negative.
We've seen that play out in recent weeks. And it's even true of the "smart money" – active money managers.
These folks are the most bearish they've been since 2023. And according to history, this setup could lead to 15% gains over the next year.
Here are the details...
Why It's Crucial to Watch the Investment Pros
The great thing about sentiment indicators is that they come in all varieties.
I often cover the American Association of Individual Investors ("AAII") Investor Sentiment Survey. This survey measures how regular mom-and-pop investors feel about the markets.
But we can find out what professional active investors are doing, too...
One way to do that is through the National Association of Active Investment Managers ("NAAIM"). This is a nonprofit organization whose members are registered investment advisers.
Every week, NAAIM asks its members about their stock exposure. Since these are the pros, this group can be anywhere from 200% short to 200% long. Then, this data is compiled into the NAAIM Exposure Index.
This gives us a glimpse of the overall positioning of investment professionals. And just as you'd expect, the index crashed in recent weeks. Take a look...
This index sat above 90% in February. But by mid-April, it crashed to just 35%. (It has rebounded since as stocks rallied.)
That reading of 35% was the lowest since late 2023, when stocks were in a correction. This tells us the recent market turmoil has even spooked the investment pros.
But like most sentiment readings, this is a powerful contrarian indicator – even when we're looking at the smart money. To see it, I looked at each unique reading below 35% since 2010.
We've seen 15 similar setups. And each has been a great time to buy. Take a look...
It has been a fantastic 15 years for stocks. On average, the S&P 500 Index rose 10.5% a year over that time. But if you had bought when active money managers were scared, you could have done even better.
Similar setups led to 7% gains in six months and 15% gains over a year. Plus, stocks were higher 93% of the time a year after these signals. So the odds of success are darn good.
Of course, today's situation is different from anything we've seen over that period. We have unique risks that mean things could get worse before they get better...
And this has resulted in falling sentiment, exactly as we expected. Folks got scared... including the active fund managers.
Now, that doesn't guarantee a bottom is in. But stocks and sentiment have both recovered from their recent lows.
That tells me the rally that's underway could be real... and the worst of this recent bout of volatility is likely over.
Good investing,
Brett Eversole
Further Reading
"Knowing what hedge funds and billionaires are doing with their money is like sitting in on private board meetings," Marc Chaikin writes. And with his proprietary system, investors have the necessary tool to track what the "insiders club" is doing with their money – leveling the playing field with Wall Street... Read more here.
"Stocks have never crashed this much at the beginning of a major bust," Brett writes. Last month, the S&P 500 plummeted roughly 10% in just two days – something that has only happened three other times since 1950. And history shows setups like this typically lead to generational buying opportunities from here... Learn more here.