The NAAIM exposure index surpassed its August high last month and has been on either side of its April high over the past two weeks. With price action cooling, active investment managers may regret their eagerness to increase equity exposure.
Why It Matters: Active managers led the recent shift from pessimism to optimism. While sentiment overall doesn’t look ready to boil over at this point, there are some hot spots that could benefit from cooling. The NAAIM data, which has outpaced the recovery in price, is in that category. The broader sentiment risk is that a period of sideways price action leads reluctant optimists to turn bearish again. At this stage in the cycle we need bulls to have a bull market and a return to pessimism would likely add to downward pressure on price. This is all the more likely if volatility remains undiminished (only 4 years in the past quarter century began with more 1% swings in the S&P 500 than we have experienced so far this year) and breadth meaningfully deteriorates.
In this week’s Sentiment Report we take a closer look at how investors have embraced this year’s strength and what could get them to have second thoughts about their recent optimism.
