02/23/24 10:16 AM EST

The NAAIM Game

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.

The NAAIM (National Association of Active Investment Managers) is a sentiment index designed to assess the average exposure to U.S. equity markets reported by the association's members/active managers.

NAAIM reports its data every Thursday, so the exposures we seeing will likely be collected and tabulated the Tuesday prior, at the latest Wednesday. This is notable since we saw a big rally late Wednesday into Thursday while active managers had theoretically deleveraged into NVDA earnings and FOMC minutes. Similar to the Tier1 systematic index, we use the NAAIM as a contra-indicator at extreme levels when active managers have more than 90 to 100% equity exposure. It's been a reliable short-term indicator that a market pullback is imminent.

On February 7, the index was at 93.77, and active managers took up exposure to 95.58 on February 14, indicating a very high level of exposure, almost reaching the upper limit historically. Not surprisingly, the market retraced. This week, the index dropped substantially to 74.70 right before the rally on Wednesday and into Thursday. This makes next week's report really interesting.

The decrease in exposure means that a portion of active managers likely missed out on the latest move upward. However, this also implies that a significant amount of capital on the sidelines could enter the market, potentially driving prices higher if these managers decide to increase their exposure again. We could have this contra-indicator back in the high 90s toward 100% next week after chasing this rally, right in time for the next retracement. Active management is hard.

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