When Everyone is on Board a Small Ship It Sinks

Published by SentimenTrader on 1/31/2013.

In early October 2011, the average active investment manager was holding a net short position.  As we noted at the time, the only other time that had happened was the week of October 10th, 2008. The data is courtesy of the National Association of Active Investment Managers.  Unfortunately it only has a history back to the summer of 2006, but it's a different and useful survey. NAAIM polls a sample of investment managers and asks them how they're positioned in stocks - from 200% net short to 200% net long.  By being more than 100% invested either way, it means that the managers are leveraged. That had never happened...until now. For the latest week, the average investment manager was holding a net long position of 104%, meaning that not only were the managers fully invested, but they were leveraging their portfolios to take on even more risk.  The previous high exposure was 96% in January 2007.		The most bearish manager in this survey is usually net short.  It's rare to see managers who are very bearish carry a net long position - these are aggressive participants, and they tend to vote with their wallet.  So if they're bearish, then they bet against the market. Not this week.  In the current survey, the most negative manager was 60% net long the stock market.  That's the most bullish position in the history of the survey, for the most bearish manager. Because even the bearish managers are net long, the "confidence" indicator surged this week.  This means that not only is the average manager extremely net long, but there is a small variation among them.  In other words, there's a lot of group-think going on. There's little doubt that these folks are sharp and savvy investors.  But when - as a group - they position themselves aggressively in one direction, the market tends to go the other way.  This is a negative for stocks, with a medium priority level (it would be higher if we had more history).