An Exposure Reset with Bullish Implications

• Active money managers are reducing exposure to equities.

• The NAAIM Exposure Index recently dropped from above 90 to below 75.

• Data indicate similar moves produced above average S&P 500 returns.

The stock market’s best opportunities show up when the crowd is convinced they don’t exist…

A contrarian mindset is one of the few durable edges in the stock market. The biggest gains rarely come from following the crowd. They come from recognizing when the crowd has pushed too far in one direction and positioning yourself for the snap‑back. Markets are voting machines in the short run, and when everyone is voting the same way, the marginal vote loses its power. That’s why the best opportunities often emerge when sentiment is stretched, positioning is crowded, and investors start reacting to headlines instead of fundamentals.

Just look at recent speculator positioning in S&P 500 Index futures. It hasn’t been this one‑sided or negative since early 2023, when the Federal Reserve was still raising rates.…

Going against the tide doesn’t mean being reckless or reflexively fading every move. It means recognizing when the emotional pendulum has swung too far and positioning has become one‑sided. At extremes, markets stop responding to new information and start responding to the imbalance of buyers and sellers. When everyone is already bullish, there’s no one left to buy. When everyone is bearish, there’s no one left to sell. The contrarian advantage comes from stepping in when others are stepping out, because fear or euphoria has already been expressed in positioning.

That’s why tracking investor exposure matters. It tells you not what people say, but what they’ve done with their portfolios. And right now, the data shows active managers have been reducing their equity exposure. A gauge I follow hasn’t been this low since last April, when the White House rolled out its initial tariff plans and investors panicked. The same pattern is emerging again: exposure is cooling, pessimism is rising, and capital is moving to the sidelines.

History says that kind of pullback usually becomes fuel for the next leg higher. When managers lack exposure, they tend to jump back in once the market starts rebounding. And based on where positioning sits today, it suggests the S&P 500 is setting up for a steady rally as sidelined money comes back into the market.

But don’t take my word for it, let’s look at what the data’s telling us…

One of the best ways for us to observe how investment managers are positioned is to follow the National Association of Active Investment Managers (“NAAIM”) Exposure Index. It tracks how money managers are allocated in U.S. equities, expressed as a percentage that ranges from fully short to fully leveraged long.

Because it reflects actual allocations, it gives a direct read on how aggressively professionals are leaning into or away from market risk. Rising exposure signals growing conviction. Falling exposure shows managers pulling back, hedging, or waiting for clarity.

The index is especially useful at extremes. When readings surge, managers are fully committed to the trend, leaving little incremental buying power if conditions weaken. When readings collapse, fear is usually priced in and selling pressure is exhausted. The index doesn’t predict turning points on its own, but it reliably shows when the crowd has leaned too far in one direction, and when the rubber band is stretched.

Late last year, equity exposure pushed into stretched territory. The NAAIM Index posted multiple readings above 100 in November and December, a clear sign that active managers had moved into leveraged long territory. But that enthusiasm has been bleeding off. Last week’s reading slipped below 75 for the first time since April of last year, a meaningful shift from “all‑in” to “dial it back”…

With the latest print at 74.93, the index has now fallen below its one‑year average of 82.5 and is drifting toward the long‑term mean of 67. That raised a simple question: What typically happens when exposure drops sharply from above 90 into the mid‑70s while the market remains in an uptrend? Looking back to 2018, there were 10 similar episodes. The forward S&P 500 results were clear…

A retreat to the mid‑70s during an ongoing uptrend has historically been bullish. It shows the market shaking out weak hands and unwinding overly exuberant leverage without breaking the underlying trend. The 12‑month data stand out: nearly a 16% average gain (price basis) with an 89% win rate. That’s well above the S&P 500’s 9.5% annualized total return (dividends reinvested) since 1928. In other words, managers who trim exposure in this zone often end up chasing the tape higher later in the year.

I also looked at the broader historical pattern of any drop to the mid‑70s or below, regardless of whether it came from extreme highs. Those outcomes were still positive, but more in line with long‑term norms…

The takeaway is straightforward: the latest reading suggests the froth has been blown off the top without damaging the trend. Historically, the combination of cooling equity exposure inside an ongoing bull market, sets the stage for a continued, steady rally in the S&P 500.

Five Stories Moving the Market:

President Emmanuel Macron said France was ‌working to build a coalition that would help secure maritime traffic imperiled by the escalating crisis in the Middle East; Macron said he is directing aircraft carrier Charles de Gaulle to the Mediterranean as action needed ​to be taken with the Straits of Hormuz closed ⁠and the Suez Canal and Red Sea shipping routes – Reuters. (Why you should care – this comes as the U.S. offered to provide Navy escorts through the Strait of Hormuz)   

Federal Reserve Bank of Minneapolis President Neel Kashkari said the Iran ​conflict has increased uncertainty about the U.S. economic outlook and made it harder to know what lies ahead for central bank interest ‌rate policy – Bloomberg. (Why you should care – Kashkari, a voter this year, is signaling he’s unlikely to support a rate cut at the upcoming FOMC meeting)

The U.S. Treasury Department and bank regulators are eyeing a comprehensive review of bank liquidity rules, arguing existing rules are ineffective and ​impede lending; Senior Treasury and Federal Reserve officials said revised requirements could ensure banks utilize tools meant to keep them afloat during times of stress, while minimizing the amount of funds they must set aside – Reuters. (Why you should care – the Treasury Department is seeking to free up more capital for on bank balance sheets for lending, to lower borrowing costs)

Federal Reserve Bank of New York President John Williams said the U.S. central bank is on track for ‌more interest rate cuts this year if inflation pressures moderate as he expects; Williams said the economy is on solid footing and he expects 2.5% growth this year – Reuters. (Why you should care – Williams, a voter, said he believes current monetary policy is in a good place to push inflation growth back to the Fed’s 2% target)

Federal Reserve Bank of Kansas City President Jeff Schmid reiterated that inflation remains too high; Schmid said that policymakers don’t currently have room to be complacent – Bloomberg. (Why you should care – Schmid, who does not vote this year, has been one of the most outspoken monetary policy hawks at the Fed)

Economic Calendar:

Earnings – AEO, ANF, AVGO, DY, OKTA, STUB

Australia – GDP for Q4

China – Official Manufacturing, Non‑Manufacturing, Composite PMI for February

China – Caixin China Manufacturing, Services, Composite PMI for February

Japan – Au Jibun Bank Japan Manufacturing, Composite, Services PMI for February (Final)

Japan – Household Confidence for February

Eurozone – HCOB Eurozone Services, Composite PMI (Final) for February (4 a.m.)

U.K. – S&P Global U.K. Services, Composite PMI (Final) for February (4:30 a.m.)

SNB Press Conference (4:30 a.m.)

Eurozone – Unemployment Rate for January (5 a.m.)

U.S. - MBA Mortgage Applications (7 a.m.)

U.S. - Energy Information Administration Crude Oil Inventory Data (10:30 a.m.)

U.S. – ADP Nonfarm Employment Change for February (8:15 a.m.)

ECB’s De Guindos (Vice President) Speaks (8:30 a.m.)

U.S. – S&P Global U.S. Services, Composite PMI (Final) for February (9:45 a.m.)

U.S. – ISM Non‑Manufacturing PMI for February (10 a.m.)

BOC’s Macklem (Governor) Speaks (10:30 a.m.)

Fed’s Beige Book (2 p.m.)

U.S. – Total Vehicle Sales for February (2 p.m.)