This is the first time I have covered this indicator so I will explain the methodology behind it. Each week the National Association of Active Investment Managers asks their members what their overall equity exposure is at the market close on a specific day of the week, currently Wednesdays. The responses can vary widely. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group. Here is the possible range of responses: 200% Leveraged Short, 100% Fully Short, 0% 100% Cash or Hedged to Market Neutral, 100% Fully Invested, 200% Leveraged Long.
The indicator is considered a contrary indicator and works best when you take advantage of extremes. For example, you would want to buy stocks when equity exposure is low (below 20%). Conversely you would want to be cautious about buying stocks when equity exposure is high (between 75-80%).
Now that we got that out of the way lets review what this weeks number is showing. The total equity exposure of active investment managers is currently at 76.42%, representing very bullish sentiment by survey respondents. It also concurs with the latest AAII survey, which indicated very bullish sentiment among the retail crowd. What this means is that it is probably not the ideal time to be purchasing stocks. Bullish sentiment is high and usually coincides with a short-term decline in stocks.
Here is a chart which compares the NAAIM Survey with the S&P 500.
Click chart for larger image
Black Swan Insights