08/13/2010

(This is an excerpt from Friday's blog for Decision Point subscribers.)

Several years ago a member of the Board of the National Association of Active Investment Managers (NAAIM) contacted me to get my thoughts about their creating a sentiment indicator based upon the investment exposure of their members. I thought it was a good idea because, not only was a new group being represented, but this group would be polled about their actual market exposure.

For example, the groups that we track are not specifically identified as money managers, although some members of those groups may manage money. We have the American Association of Individual Investors, Investors Intelligence (newsletter writers), and Wall Street Sentiment (technically oriented message board participants). All these polls are based upon opinions, not actual money deployed. I think the NAAIM Sentiment poll adds a useful dimension to sentiment analysis, and we began charting it this week.

NAAIM has been collecting data since 2006. Approximately 40 NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on Wednesday. Responses can vary widely as indicated below. Responses are tallied and averaged to provide the average long (or short) position or all participating NAAIM managers, as a group. Note that these are "active" managers, not those who are tasked to be 100% invested 100% of the time. Range of responses:

• 200% Leveraged Short
• 100% Fully Short
• 0% to 100% Cash or Hedged to Market Neutral
• 100% Fully Invested
• 200% Leveraged Long

While it is possible for the group to be substantially short you can see on the chart that there are only two instances where the average was short, and then only by a small amount (circled).

It also appears to me that, for the most part, the members react to market trends rather than anticipate them. One exception being the last quarter of 2009 where exposure contracted ahead of the January 2010 correction. Let me clarify that for people to react to trends is normal behavior, and it is reflected in all sentiment polls. When too many people are bullish or bearish, we need to be alert for possible trend changes; however, the majority can be right for quite a long time before the market turns.

The next chart shows all of the historical data available.

Bottom Line: The NAAIM Survey of Manager Sentiment is a useful addition to our array of sentiment indicators because it shows to what extent professional money managers are actually deploying money. For more information go to NAAIM.org.

* * * * * * * * * * * * * * * * * * * * *

Technical analysis is a windsock, not a crystal ball. 

* * * * * * * * * * * * * * * * * * * * *

Decision Point's Timer Digest Rankings

* * * * * * * * * * * * * * * * * * * * *

BIO: Carl Swenlin is a self-taught technical analyst, who has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of DecisionPoint.com, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports. Mr. Swenlin is a Member of the Market Technicians Association. 

* * * * * * * * * * * * * * * * * * * * *

Copyright 2010 Decision Point. This article may not be summarized, reproduced, or rebroadcast in any fashion without our written permission.  Nothing herein should be construed as an offer or solicitation to buy or sell any security. Past performance does not indicate future results.