The dumber smart money says it ain’t the bottom yet

I’d like to give a shout out to Five Star Charts today for an interesting observation regarding  a different view on investor sentiment.

Rather than focus on “dumb money” as an indicator of an oversold capitulation point, Boris Chai – founder of FiveStar –  focused on looking at institutional money as a contrarian indicator. Interesting, given that many institutional players are often counted in as “smart money” when looking at sentiment. But…not all of them. For example, many hedge funds and mutual fund managers invest with a worse track record than the “real” smart money (ie commercial hedgers, select institutions). So, as a group, sometimes the institutions are good contrarian indicators insofar as their fear/greed readings.

I recreated a chart that Mr. Chai posted in his recent research update. Apologies to Mr. Chai if I failed to recreate it perfectly – but I think you will get the gist. In a nutshell, he feels that the institutions are not yet bearish enough to signal a true bear market bottom. I believe that Mr. Chai, along with my own way of viewing the markets, is looking for a short termed rally – keeping a cautious eye on the mid-termed potential for markets. His indication is that the NAAIM Exposure index should break “30” before a bottom might be put in.  The chart below is shows the S&P 500 on the top pane (monthly bars) back to 2007, with the bottom pne displaying the NAAIM index along with its 5 day SMA.  The “30” level (aka oversold) is indicated with a dashed green horizontal line. I’m going to quote FiveStar directly regarding the chart:


“In a bear market, an oversold situation could be extended to more oversold. That’s why if you try to find a short-term bottom, you better not. However, NAAIM Exposure index could give us hints about an oversold market. NAAIM Exposure index represents small regional investment firms to large national investment firms, including hedge fund managers, mutual fund companies and a variety of other investment firms their average exposure to US Equity markets. The current reading is at 51.35% which means the professional money managers have an average 51% exposure in US equities. In an extreme oversold situation, the index could drop to 30% to 40%. If the index could reverse the current downtrend, it could mark a short-term bottom. But it doesn’t seem it is happening. The upcoming FOMC meeting could be a market event. We may see a capitulation of selling. The VIX is also ready for breaking to a new high from the current level. Trade with cautious if you are in the short side!”

For those interested – I note that readers interested in trying the FiveStar research portal out for a while can sign up for a free 1 month trial.


Keith on BNN this Friday December 21 at 6:00pm

You might want to tune into this one folks—I’m sure I’ll have lots to talk about, given recent market developments.


  • Hello Kieth,
    Looks as though we broke through the 2540 level on the S&P500 yesterday and especially today. You mentioned if this level is breach, it would give you a sell signal and we go into a bear market. So, I assume the next level of support is 2300?
    Thank you ,

    • I’d guess it to land in the low 2300’s IF the SPX stays below 2540 for 3 days..this is day 1

  • When you sell to raise cash, do you have a percentage in mind of cash you want to get to?
    Would you go so far as to use some of your cash to short the markets by buying something like the SH ETF?

    • I am good with buying single inverse ETF’s for small portions of the portfolio to reduce beta
      We usually go to cash, though.

  • I think we are almost at the end, at least temporarily of this pullback. SPX is almost at its 200 week MA which is a point it previously hit and bounced upward (Feb 2016). In addition the projection of the head and shoulders top is near completion. Market could go down a bit more maybe 30 points on SPX. But I expect at least a decent bounce in a few days.

  • Keith, Season Greetings – wow “may we live in interesting times” …
    Other analysts are bullish on Energy (or were, not sure where they are currently) so I went to cash until 2 weeks ago and then went in on the low, or so I thought – SPEN below 150 and $BPENER below 5% and then … LOL … as you said on Friday “this happened” and its looking to continue.
    Sooo … do you have any thoughts on energy … hold the position or take the loss, albeit smaller than it might have been, go back to cash again …

    • Bruce–you are the second reader to ask that opinion–I will cover the topic of energy next week, after my poisonous rant. Look for it mid-week


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