When Pro’s are scared

Are you scared in the past two months due to the somewhat severe correction that has not happened in more than 2 years? I guess many of you are indeed based on some offline conversations I have had. How do you think about so-called Pro’s who are specialized in managing the customers’ money for investing and trading? Intuitively probably you would think they were less emotionally involved and less impacted by the ongoing correction. Wrong! Honestly those pros as a whole are not too much different from the herd as far as I know and they are often euphoric when the market is going up and depressed when the market is going down. Actually their sentiment, when going to extreme, can serve as a great contrarian indicator. BUT let me be very clear, I’m not saying all the pros are bad. Actually I know quite a few pros who are extremely smart and good in trading and investing. I’m here just talking about the general phenomenon when you put all the pros together as an average.

Have you heard NAAIM Exposure Index? Likely not.  NAAIM stems for National Association of Active Investment Managers. This is really a group of people that can be truly called professionals in investing and trading. The NAAIM Exposure Index is a weekly survey among the hedge fund and mutual fund managers to show how much their portfolios are exposed to stocks at the current time. Of course zero means they are not in stocks at all and the index can go above 100% actually if they are leveraged by borrowing money to invest. In other words, this is a great way to reflect what is the mood of the pros based on the current stock market status. I’m sure you can guess that the index should have stayed high during the past two years given the extremely low volatility and well maintained uptrend in the stock market. Yes, indeed, the index has been mostly well above 50 suggesting more bullish than bearish sentiment among the pros. Guess when their mood reached to the extreme at the high end? Yes, Dec last year when it touched 120, indicating an extremely euphoric mood among pros to not only have gone all in but with significant leverage. That’s the time one needs to be really cautious and worried about the downside. Sure enough, the stock market reached to its top in Jan and started to rollover to punish those who were chasing highs. You can guess, those pros have also been punished well enough. Same as a typical herd reaction, pros started to feel nervous and dumped stocks heavily in the past 2 months.  So much so that the index dropped below 50 in Mar, first time in two years. While it is not a perfect timing indicator, it is indeed a good sign that pros are very scared as well at the moment and as a contrarian investor, I start to be cautiously bullish as I have told you a couple of weeks ago. So don’t blindly trust pros for managing your money. While you may find some good pros, many are just average at most.  After all, they are not too much different from the herd investors typically chasing highs and selling lows. Don’t be too pessimistic for now, folks.  Go against the Pros when they are scared! Of course, I’m not talking about day to day extremely short term trends. Rather, in the next few months, it is a safe bet to go against the Pros’ pessimism!!