Active money managers have reached a remarkable 99% exposure to the US stock market – a level seen only 4 times in the past 2 years.
This critical development has made us adjust our portfolio allocation at Bravos Research.
Understanding the NAAIM Exposure Index
The NAAIM Exposure Index tracks Wall Street money managers’ stock market exposure.
While we don’t typically focus heavily on this indicator, extreme readings often mark turning points in the market.
A reading of 100 indicates institutional investors are fully invested in stocks – a potentially dangerous situation.
Historical data reveals that similar spikes to 100% exposure often coincide with local market peaks.
These elevated levels create vulnerability because when managers eventually rebalance their portfolios, the resulting selling pressure can trigger significant market volatility and temporary declines.
Conversely, very low exposure readings often mark market bottoms.
During these periods, managers’ subsequent buying creates powerful upward momentum as they re-enter positions.
Given the recent 99% exposure reading, we’ve adopted a more defensive stance.
This strategy has served our clients well over the past 2 years during similar extreme readings.
However, our adjustment represents tactical rebalancing rather than a full pivot to a bearish positioning.
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Current Market Context
Despite our cautious adjustment, we’re not predicting an imminent correction.
The S&P 500’s price structure remains decidedly bullish, supported by the same forces driving gains since October 2022.
A major driver has been the stabilization of long-term US interest rates.
For instance, rising rates were a headwind in 2022.
But, when they steadied in late-2022, the stock market rallied.
So, the recent decline in rates should be positive for the stock market.
However, given the high exposure among money managers, it’s only a matter of time before they rebalance their portfolios.
When everyone’s overexposed, rebalancing becomes inevitable.
So, we’re proactively rebalancing ours.
New Trading Opportunities
Our recent portfolio adjustments include several strategic moves.
We’ve initiated a long position in natural gas as it breaks out of its basing pattern.
The Healthcare sector presents a unique setup.
Earnings have declined recently, breaking a 30-year growth trend.
At the same time, Healthcare valuations recently reached levels not seen since the dot-com bubble.
A weak sector with declining growth and expensive valuations is a recipe for trouble.
We think the healthcare sector’s forward PE ratio could revert to its 2015-2020 range.
If it falls to a PE of 14, it would be a potential drop of another 20-30% from current levels.
These adjustments reflect our cautious approach.
But make no mistake, we’re still net long on the US market.
We hold long positions in multiple US stocks and cryptocurrencies.
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