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.

Back to one of our favorites, the NAAIM index - a preferred contrarian indicator at extreme levels. The index measures the exposure of active investment managers to US equity markets. On April 2nd, we wrote: "The current value of 103.88 suggests active managers are heavily allocated to stocks, which could be interpreted as an overly bullish stance, leaving little room for more upside." 

NAAIM Exposure Index Inching Higher - tier1

For context, the extreme low end of the index is 40%, and the high end is 100% - anything above 100 is overweight equities. Since our April 2nd post, the S&P 500 is down 3%. We've flipped negative gamma a few times, not exactly Armageddon, but the lesson is what counts. Just like the Tier 1 systematic index, these exposures build until unsustainable levels, then the hurdle to go higher becomes increasingly difficult. We then see deleveraging in the typical sequence: demand for longer-dated hedges rises on a relative basis, dealers flip to negative gamma, volatility increases, forcing systematic flows to deleverage, and the active community follows - the merry-go-round continues.

Inevitably, after the fact, we see the catalysts; in this case, CPI and geopolitical factors. However, the extreme levels of exposure foster conditions for the market to be more vulnerable to such events. At the moment, the NAAIM index sits at 81.92, still a moderately high level of equity exposure but significantly less than at the highs. Something we will continue to monitor closely.

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

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