01/08/24 08:46 AM EST

Money Managers Shedding Exposure to Equities

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.

On December 26, we covered the NAAIM index. Our chief takeaway was that active managers had taken up equity exposure to their maximum allocation. On December 20, they were 97% allocated to equities, and by the 27th, they were allocated at 103%. This was interesting to us for two reasons.

Firstly, on December 15, we were surprised that after a 700-point rally in SPX, active managers were only 77% allocated to equities. A few weeks later, they had chased the market higher to be fully allocated. Presumably, much of that in the Russell 2000.

Secondly, the NAAIM index was a reliable contrarian indicator for us in 2023. Above 95% exposure, the market has been overbought by active managers. And below 40%, it's oversold. This becomes particularly interesting if our systematic models also match in the case of CTAs almost historically high equity exposure to the end of the year.

Last week, active managers reduced their equity exposure by 32% to 70.95%. Today's bonus section is more of an explainer on pulling all the pieces together. Historically high exposure to equities by systematic strategies, coupled with overbought positioning from active managers, plus extreme levels of bullish breadth, then a phase change to negative gamma, which means higher volatility, and soon, the anatomy of a sell-off takes shape. It works in reverse for oversold conditions. The particular starting points matter.

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