12/15/23 10:26 AM EST

Market Confusion Around S&P Rally

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.

Our readers will recognize the NAAIM Exposure Index, one of our favorites. National Association of Active Investment Managers member firms are asked each week to provide a number that represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses are tallied and averaged to provide the average long (or short) position of all NAAIM managers as a group.

It surprised us a little bit this week. After a 7-week, 700-point rally in S&P 500, we might have expected the active management community to be at their maximum exposure to equities like we saw in June and July. If anything, active managers have taken down their exposure marginally since November. On November 29, active managers were 81.38% exposed to equities; today, it’s 77.97. It’s not what we expected. In the first three weeks of July, the S&P 500 rallied from 4378 to 4566. In the same period, active managers ramped up exposure to equities to 101%. They are not chasing this rally with anywhere near that uptake.

This behavior suggests a large amount of confusion around. We have all become accustomed to having an investment thesis and allocating capital accordingly. Nobody has absolute conviction about an outcome for the next 12 months, from the Fed down to retail investors. We think people are learning that it’s very acceptable to have a thesis and allocate accordingly in this environment. However, if you are wrong, the market is doing the exact reverse of your thesis, and you need to switch. It’s not easy to have a soft landing and hard landing plan and know when to change. We see that in the NAAIM: trading … the hardest easy money in the world.

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