Investors shunned the stock rally for most of the year… But after months of gains, they’ve finally started to come around.

We first saw it with the American Association of Individual Investors (“AAII”) sentiment survey in July. It showed “mom and pop” investors were finally getting bullish on stocks.

Now, the investment “pros” are following their lead…

According to a specific index, active investment managers are betting on a stock rally at the highest level since late 2021. But as we’ll see, that’s not a reason to sell just yet.

We’ll need to see higher levels of bullish sentiment – and for longer – before we start worrying about the market.

Let me explain…

Investors always worry the most near a market bottom. So it makes sense that folks were bearish on stocks at the start of this year…

Sentiment turns around as prices recover, though. And that’s what has happened this year.

We can best see it by looking at the National Association of Active Investment Managers (“NAAIM”) Exposure Index. This index reflects how much exposure these investment pros have to stocks.

The NAAIM has been around since 1989. It’s a nonprofit organization that brings together active investment managers from around the world.

Each week, the association asks its members what percentage of their portfolios are in stocks. It averages the responses to build this simple index.

A reading of 100 shows that, on average, professional money managers are fully invested in stocks. And a reading of zero means that these folks don’t own any stocks. So the exposure index is high when the pros are bullish on stocks… and low when they’re bearish.

Not surprisingly, the index was low near the start of 2023. But recently, it hit a year-plus high.

You can see that move to the upside in the chart below. It compares the S&P 500 Index with the pros’ sentiment readings. Take a look…

The NAAIM index spiked to 102 in late July. That’s the highest reading we’ve seen since November 2021. And it tells us the pros have been getting more excited about stocks, especially after this year’s incredible rally.

Don’t take that bullish reading as a reason to sell just yet, though…

First, let’s look at the other side of the coin – the times when the exposure index has hit major lows. You’ll see that the index tends to recover quickly from those crashes. And those lows also happen darn close to market bottoms (if not in line with them).

Last year’s sentiment low happened two weeks before the ultimate bottom for stocks. March 2020’s low happened the same week as the market bottom. And in March 2009, the index cratered the same week as the overall market.

This tells us that bearishness on stocks among investment managers is a strong indicator of a market bottom. But the relationship isn’t so simple with bullish readings…

The NAAIM index started to hit extreme highs in June 2020. But stocks didn’t peak for another year and a half.

Similar lags have happened throughout the past decade, too… We saw bullish readings throughout 2013 and 2014. But stocks didn’t take a dip until 2015. Then, we saw bullishness from mid-2016 through 2017 – until the market finally took a hit in 2018.

The point is, wildly bearish readings tend to tell us the bottom is in… But similarly bullish readings need to stick around for a while before we see a top in stocks.

We’ve only seen a few weeks of elevated bullish levels. That means it isn’t time to give up on stocks just yet.

History shows we’ll need to see this index stay elevated for a year or more before stocks hit a peak. So, despite this bullish revival from the pros, we’re still a long way from the threat of a lasting market decline.

Good investing,

Brett Eversole

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Source: Daily Wealth