NAAIM buy signal update

I had highlighted an unusual contrarian buy signal in my last post (see Round number-itis at 2500). NAAIM sentiment, which is reported weekly, turned anomalously bearish last week and fell below its lower Bollinger Band. Past episodes of such occurrences have turned out to be very good contrarian buy signals.
 

 

The reading last week was anomalous because every other sentiment indicator had become more bullish, while NAAIM RIAs got more bearish. This week, NAAIM managers turned more bullish, while the AAII survey became more cautious.
 

 

Was last week’s contrarian buy signal for real, or a data blip?

A dive into the data

For another perspective, the bearish extreme reading disappears when we apply a 4-week moving average to the NAAIM readings.
 

 

We can get further clues when we dive into the data. Here is the data table as published by NAAIM:
 

 

Here are my main takeaways:

• Last week, the average NAAIM exposure fell, but the median exposure (difference between quartile 2 and 3) rose.
• Last week, the quartile 1 break fell dramatically. This led me to speculate that the decline in the average exposure (compared to rising median bullishness) was attributable to a data error, possibly because of an erroneous data entry of zero for a manager.
• NAAIM has admitted on their website that their sample size is not large: “Although the number of participating managers, known as NAAIM Trend Setters, is steadily growing the sample size is not large and therefore may be less reflective of actual market conditions.”
• This week, average NAAIM exposure rose, and the quartile 1 break recovered significantly.

This week’s readings are consistent with my hypothesis of a data entry error last week. In all likelihood, a sentiment response was keyed in improperly last week, which dragged down the average reading. In light of the near universal rise in bullishness last week from all other sentiment surveys, I interpret last week’s NAAIM survey response as a data blip and not a legitimate contrarian buy signal.

Still tactically bearish

That said, my inner trader remains tactically bearish, though he recognizes that the stock market remains in an intermediate bull trend.

In particular, one contrarian sell signal from Trade Followers has been particularly effective. This signal is flashed whenever all sectors are showing bullish Twitter breadth readings, which they did last Friday.
 

 

Excluding the current signal, there were six similar sell signals since 2015. In five of the six instances, the market either declined or stalled. There was only one failed signal, which occurred in March 2016, though the market did decline slightly the week after that signal. Here is a list all of the past Trade Follower posts of with similar sell signals:

• Cracks in the dam (August 6, 2017)
• Short term top ahead (February 20, 2017)
• Time for a short term top (August 14, 2016)
• Everyone is waiting, but… (June 5, 2016)
• Short term top likely (March 13, 2016)
• Twitter predicting decline for stocks (March 1, 2015)

 

In addition, Tom McClellan recently warned about short term stock weakness due to subdued volume in XIV. Past episodes of low XIV volume have been signals for traders to be cautious.

As a result of these factors, my inner trader is maintaining his short term short exposure to equities.

Disclosure: Long SPXU