A look at the NAAIM Exposure Index and the TD Ameritrade IMX Index
I checked it out last week Investors Intelligence sentiment poll, which I refer to often, and the AAII Sentiment Survey. This week I am sharing some numbers on some of the other sentiment polls that we are looking at and are referencing Outlook for Monday morning now and then. These are sentiment surveys by the National Association of Investment Managers (NAAIM) and TD Ameritrade. I spend a little time on the methodology of each survey. Knowing who is being surveyed and how is important as this will determine the importance and potential impact of the survey. Then I show some numbers to see if there is any potential signal that can be generated from the results.
NAAIM exposure index
The NAAIM is an organization comprised of SEC-registered investment advisors who are active in active investment management for retail clients. In the weekly survey, they are asked for a number between -200 (leverage short) to +200 (leverage long), with +100 fully invested and 0% means that their portfolios are hedged in cash or market-neutral. What is relevant is that the survey is based on where their money is invested, not how they see the market. Opinion polls are volatile and change quickly with market direction. Changing exposure to a portfolio is a more sensible measure. This assumes that their answers truthfully represent their portfolios, which I have no reason to doubt, but since this is a survey, the chances are the results may not match reality.
We have data from the NAAIM Exposure Index dating back to mid-2006. The current value is difficult to see on the chart, but it is just below 80. This means that on average the investment managers are heavily invested in stocks, but nothing unusual. In fact, looking back 52 weeks, I found that the reading was relative to the highest and lowest reading and that it is below the 50% value, which means that it is closer to the lowest than the highest. To me, investment managers are not nearly as optimistic as I would expect.
Based on the above, I’ve looked at previous cases where the NAAIM value was less than 50% relative to its 52-week high and low, while the S&P 500 Index (SPX) has seen its highest in the past few Reached 52 weeks. The following table summarizes the performance of the S&P 500 after the other eight events. The returns, especially in the short term, are abysmal. Three months after these events, the index posted an average loss of more than 3% and was only positive three times. The 6 and 12 month returns are below the typical returns since the first signal in 2013.
For the curious, here is a table of these individual signals. There was a signal only a few months ago. The last signal before that came shortly before the Covid crash in February 2020.
TD Ameritrade IMX index
TD Ameritrade publishes its Investor Movement Index (IMX) monthly. The IMX is based on actual retailer brokerage accounts. This seems like a very good measure of retail sentiment as it tracks the stocks they buy and sell rather than a survey of their feelings. Unlike investment managers, these retailers are extremely optimistic. The IMX value was above 9 points for the first time in the latest report. Note that the latest report we have is from the end of June. The S&P 500 has risen another 3% since then, so it wouldn’t be surprising to see the IMX climb again.
Since we are at an unprecedented level in the index and there are only monthly data points, each signal would show at most a handful of data points. Therefore I am only giving my subjective reading of the diagram and the interpretation.
In contrast, it is always worrying when retail investors become extremely optimistic. However, some optimism is expected if stocks continue to hit all-time highs, which may give us some comfort. To allay our fears, we would like every small pullback in stocks to result in an oversized downward move in IMX value. This would indicate a certain nervousness among retailers. Unfortunately, the graph now looks a bit like the end of 2017, when the IMX climbed to all-time highs along with the S&P 500. The next year, 2018, the index fell 6%. Another bearish interpretation would be to contrast this poll with the NAAIM index we talked about above. The investment managers could be viewed as the more experienced investors or the smart money. It’s a bad sign when the smart money index is nowhere near an extreme but the dumb money retail index becomes parabolic.