Raising Distribution Risks, Pros Slightly Pull Back Enthusiasm, Retail Still Gung-ho

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After persistently remaining elevated for several weeks, investor sentiment is coming under pressure a little. Assuming institutions began distributing, retail would not be able to mop up all the supply. Record margin debt then becomes front and center.

Equity bulls are pulling back their horns – a tad.

Last week, the NAAIM Exposure Index dropped 12.4 points week-over-week to 89.1 – a six-week low. This survey measures National Association of Active Investment Managers members’ average exposure to US equity markets. Concurrently, Investors Intelligence bulls last week fell 1.2 percentage points w/w to 62.4 percent – a five-week low. This survey polls newsletter writers.

In other words, the NAAIM survey reflects the sentiment of professional money managers, while the newsletter writers are focused more on retail. In both, sentiment has remained elevated.

Prior to last week’s sub-100 reading, the NAAIM survey posted 100-plus for five straight weeks. Going back to July 2006, there have only been 25 100-plus readings, with nine of them just since August. On the other hand, Investors Intelligence bulls remained over 60 percent for five straight weeks; the 64.7-percent reading four weeks ago was the highest since January 2018.

At least going by how last week fared, retail sentiment is holding up better than that of money managers (Chart 1). This is a little too early to declare, but it is possible institutions are unloading shares to retail.

If indeed a distribution is taking shape, then, ahead of this, retail has been aggressively betting on higher prices using options.

On December 17, using a 21-day moving average, the CBOE equity-only put-to-call ratio dropped to 0.407, even as the ISEE index (all equity) rose to 180.1. The latter is a call-to-put ratio hence inverted in Chart 2.

ISEE excludes trades from market makers and brokers/dealers and only uses opening long trades. Market makers need to hedge exposure all the time; retail, on the other hand, bets on direction. So, the message coming out of it is considered cleaner than the one coming out of the CBOE put-to-call ratio.

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This blog is not intended to be, nor shall it be construed as, investment advice.  Neither the information nor any opinion expressed here constitutes an offer to buy or sell any security or ...

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