Trader’s Narrative

Here’s an up and coming sentiment tool that I discovered recently. It is released weekly by the National Association of Active Investment Managers (NAAIM), a non-profit association of registered investment advisors formed in 1989. Since the (200 or so) member advisors provide active money management services to their clients, as opposed to buy and hold, they position their portfolios according to their opinions of the market’s future. In reality every portfolio is actively managed because there is no way to be passive.

In any case, each week on Wednesday, the advisors communicate their equity exposure by choosing one of the following answers:

• 200% — Leveraged Short
• 100% — Fully Short
• 0% — 100% Cash or Hedged to Market Neutral
• 100% — Fully Invested
• 200% — Leveraged Long

Their answers are then averaged to produce the NAAIM Trend Survey of Manager Sentiment:

Although we only have two and a half years of sentiment data and a relatively small sample size, this sentiment indicator shows promise. To start its extremes correspond to tops and bottoms in the S&P 500. For example, when active managers reduced their exposure to “neutral” in late August 2007 and July 2008, we saw the S&P 500 find its feet again.

But the latest active managers sentiment is somewhat troubling because even as the market weakness has continued for several months, they have positioned their portfolios more and more aggressively long. Once again we are seeing that we do not have a “wash-out” or complete capitulation. On the contrary, everyone it seems is even more hopeful… as the market falls even lower!

Although the NAAIM data is weekly, it comes out with a delay. The latest result is for January 14th 2009. I’ll update the chart when the new data is released or when it tells us some other interesting things about the market.

If you want to get more information or download the raw data to play around with it, you can do so at the NAAIM website.

While the active vs. indexing argument rages on in the investing world, it is a moot point. Everything is actively managed. The only difference is that some funds are more actively managed than others. (Sorry Bogle.)

Every single index out there was created by someone or by some committee and it is regularly updated and managed to keep pace with the changes in the real world.

That goes for the Standard & Poor’s 500 Index, the behemoth out there that has more money following it than any other index out there. The composition of the list of 500 stocks is presided over by the S&P Index Committee, a group of employees of McGraw-Hill Companies.

They follow a few guidelines:

• U.S. Company
• Market Capitalization: min. $4 billion
• Public Float at least 50%
• Adequate Liquidity and Reasonable Price.
• Sector Representation
• Company Type: operating, not CEF, REIT or BDC

But, in the end, these are just guidelines and the committee has full discretion to include any company and to exclude another, even if it technically meets all the criteria.

Every once in a while the committee faces a rare situation where a large portion of the S&P 500 Index does not meet one or more requirement they have outlined. Usually the simply ignore it and hope that it just goes away on its own.

In October 1987 there were 35 S&P 500 Index stocks that traded for less than $10 a share. In the aftermath of the September 11th terrorist attack, 59 S&P 500 Index companies traded for less than $10 a share. Right now we are going through a similar situation.

Currently there are about 101 S&P 500 Index stocks trading at sub $10 a share. Unbelievably, one S&P 500 component, E*Trade (ETFC), closed below $1 a share. And there are 36 stocks trading below $5 a share. These are levels at which stocks are called “penny stocks”. You can find a table of the constituents, ordered by share price here:
Continue reading ‘S&P 500 Index: Now More Poor, Less Standard’