The markets closed negative for a second consecutive week— albeit mildly with the S&P 500 only down -0.13%, the Nasdaq -1.17%, and the Dow Jones nearly flat at -0.02%.
Pressing The Long Bet
Last week, active fund managers, as measured by the NAAIM Index aiming to represent average exposure to US equities, hit a 2+ year high reading. In my analysis, I often pair this exposure level with the sentiment score from the CNN Fear & Greed Index. While this analysis alone may be insufficient, I find it provides valuable context to the market's operating environment.
The NAAIM exposure index recorded 104.75 last week— the last time fund managers positioned this bullishly was in November 2021.
As indicated by the CNN Fear & Greed index, next week marks the fourth month of the market operating in a greed environment.
Below is the S&P 500 chart with marked relative highs of each index. Red arrows denote sentiment, while blue arrows represent exposure.
The chart delivers two observations
Since the previous market peak in 2022, significant declines have consistently followed periods of excessive greed and heightened exposure.
December 2023 stood out as an exception, where "buying greed" proved rewarding.
My speculation remains unchanged— December's unusual reward for buying greed has fostered a sense of complacency. Market participants are increasingly "pressing the bet," forgetting the time-tested strategy of "buy fear, sell greed" that historically yields better results.
In this week's note, we will assess the status of the three correction criteria and briefly examine Apple's current position. I continue to speculate that when all three correction criteria are active, the S&P 500 will likely experience an 8% to 12% correction, effectively erasing the year-to-date gains. However, until these criteria are met, it's premature to take significant positions against market euphoria.
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