Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

We wrote the following on October 9th:

“The NAAIM (National Association of Active Investment Managers) Exposure Index offers insights into the collective thinking of active investment managers, revealing their average position in U.S. equity markets. The 40% green line we've underscored typically marks the lower boundary of exposure for managers reporting to NAAIM. It’s noteworthy these active managers have pared down to a 40% equity exposure, especially doing so even as the market strengthened over the past week.

Unlike the algorithmic approach of systematic flow strategies, active managers are human, factoring in a myriad of concerns from U.S. debt and OPEC dilemmas to UAW strikes, surging mortgage rates, geopolitical tensions in Israel, and the evident deceleration of growth. Over recent months, we've observed the NAAIM closely, noting its prescience relative to systematic flows. Given the current scenario, it's plausible that NAAIM is capturing the prevailing sentiment, signaling a forthcoming downturn in systematic investments.”

Fast forward to October 31, and the S&P 500 is down 5% from the October 9 letter, and a commensurate sell-off in systematic strategies.

Don't Let S&P Movement Trigger Extreme Reactions - 10.31

Typically, extreme NAAIM levels have served as reliable contra indicators. For instance, 100% equity exposure often signals a peak in equities, while 40% exposure typically indicates a trough, except for the last instance where the setup was different, we pointed this out in our webcast on the 9th.

Recently, active managers trimmed their equity exposure from 66.67% on October 18 to 24.82% this week, with an average Q3 positioning of 60.53%. Our observation suggests active managers might have become slightly too bearish in the short term compared to the market structure. We view the 24.82% figure as another contra indicator. We'll address this tactically in the band section. A minor lower low in SPX and NDX will likely precede a rebound in the next few days. It will be intriguing to observe how active managers adjust after a 2% or 3% bounce from the lows.

Learn more about the Market Situation Report written by Tier 1 Alpha.

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