As Walter Deemer observed, “When the time comes to buy, you won’t want to, and when the time comes to sell, you won’t want to either.” Sentiment and positioning indicators by themselves won’t make us any less scared about bad news, or any less euphoric about good news, but they can help us identify when everyone else could be making emotional and suboptimal decisions that we can exploit. These indicators did a great job of telling us the market was fearful at the end of March and that conditions were setting up for a bounce. Let’s have a look at what they’re telling us now.

NAAIM Exposure Index

First up, the NAAIM Exposure Index, which comes out every Thursday. It represents the average exposure to US equity markets reported by NAAIM members. When this number exceeds 100, it suggests survey participants are too bullish - readings over 100 have often preceded periods of pullback or sideways consolidation for stocks, as shown in the chart below. Last week’s reading was 77, well below the 100 danger zone, which the index hasn’t exceeded during the recent rally. So, this one looks OK.

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AAII Sentiment Survey

The AAII Sentiment Survey captures the opinions of individual investors by asking whether they think the market will move up, sideways, or down over the next six months. This is quite a noisy series, so I use a five-week moving average of the Bull/Bear ratio to spot extremes. As you can see in the chart below, there are no signs of euphoria among survey respondents at the moment.

CTA Positioning

Hat tip to Scott Rubner at Citadel Securities for his take on CTA positioning. He notes this week that many CTA strategies are approaching high equity exposure levels, meaning their risk management rules will cause them to add selling pressure in a down tape. This positioning measure is much less reassuring than the NAAIM and AAII surveys.

The Options Market

Like CTA positioning, the options market also suggests an amber flag. I look at the 5dma of the put/call ratio, published as part of CNN’s Fear & Greed feature. This indicator is low due to very high demand for bullish call options, which suggests investors have got ahead of themselves.

BofA Global Fund Manager Survey

The chart below is from the Bank of America Global Fund Manager Survey (h/t to Callum Thomas for the share on X). It shows a record monthly jump in equity allocations among survey respondents. That suggests extreme institutional FOMO, and represents another amber flag.

Putting it all together, what are these metrics telling us? As a general observation, it’s much harder to identify the moment when market psychology has become so euphoric that we need to adopt a defensive stance, than the moment when panic peaks. Currently we have conflicting evidence. On the one hand, the NAAIM and AAII surveys look OK, on the other hand, CTA positioning, the options market, and the BofA FMS survey suggest psychology is too bullish. My interpretation is that the market probably needs a short-term pause to allow the euphoria of the April-May rally to wear off. A little backing and filling will reset market psychology and allow the bull market to continue in due course.

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