two conflicting signals on the US markets

1 mins. to read

Below is a chart of the National Association of American Institutional Investors which shows the sentiment reading of these key investors in relation equities. We can see that it reached a near 3 year peak recently and has, interestingly, detached from the S&P500 index level. It generally leads the market lower and so for the bears, this is potential fuel to look for a snap back. 

If the NAAIM measure and the correlation with the S&P 500 follows previous history then we could be looking at quite a sharp snapback. The measure seems also to be a leading indicator.

Here is a contrasting chart however for the bulls! This is a measure from Investors Intelligence and which shows the number of participants looking for a correction. You can see that when it hits 40% that it acts as counter indicator (as ever, the majority is always wrong) and has, in the recent past, preceded interim decent uptrends. In fact, drilling a little deeper and looking to see what the market does when the figure hits 35% (where it is now), we see that it has a near 70% success rate and the median return 6 months out is almost 6% (green box).

How to play these conflicting signals? We would look to incept a calendar put spread AND a calendar call spread 3 months out. Take a look at our option guide below to learn more about options trading and the risk mitigating potential of these instruments.

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