NAAIM Exposure Index Diverging

The NAAIM Exposure Index reached a high of 99.3 on July 2, and has been backing off since then even though the SP500 is going higher.  This condition has historically been a problem for the stock market.

NAAIM is the National Association of Active Investment Managers, made up of money managers who believe that they should not just buy and hold, but also to be in the market at the right times.  Each week they survey their members about their firms' average stock market exposure.  Answers can range from as low as -200 for a leveraged short position, up to 0 for being out of the stock market, and all the way up to +200 for leveraged long.  They can also be anywhere in between -200 and +200.  Those survey responses are averaged together to get the NAAIM Exposure Index.

Even though these money managers are professionals, they still suffer from the same fears as anyone else, and so the Exposure Index tends to rise and fall with price action.  It can be useful when it gets to an extreme value, which history shows consists of going above about 95 or below about 40.  This index saw a low of 35.16 back on April 16, 2025, when tariff worries reached an extreme.

What I find interesting about the high readings is that sometimes they show a divergence versus prices like what we are seeing now, as this group of money managers evidently starts feeling twitchy about the market and starts sneaking toward the exits.  We saw a divergence like this back at the end of 2021, before the big bear market of 2022.  We saw it again early in 2025, ahead of the tariff crash in April 2025.  But we have seen such divergences at other times too, when they did not work out to bring a big decline.  This is an important point about any type of divergence versus prices: They don't have to matter right away just because one might notice them, and they can get overcome by subsequent events.

So the current divergence between the SP500 and the NAAIM Exposure Index is a warning of trouble, and a sign to watch out for problems.  It is not a guarantee that trouble has to show up.