The tactical investment advisors in NAAIM survey have really retrenched, 10-month low in equity exposure.

S&P pulled back ~5% and has now fully recovered over the past month, but it allowed the overheated parts of the market to come off the boil and for sentiment to moderate. pic.twitter.com/0czbVJ0GAD

— Michael Santoli (@michaelsantoli) March 11, 2021

Today’s Chart of the Day was shared on Twitter by Michael Santoli (@michaelsantoli). It’s a chart of the NAAIM Exposure Index over the past two years. This index is based on a survey in which active fund managers are asked their exposure to the stock market. Like most sentiment indicators, it is used as a contrarian indicator. Generally speaking, levels over 80% indicate excessive optimism, while levels under 20% indicate excessive pessimism. The S&P 500 pulled back a mild  5% recently, and yet this sentiment indicator plunged to a 10-month low. Leading up to the pullback, there was a lot of concern over excessive optimism. But as Michael points out, it looks like the pullback did a lot to dampen optimism and reset sentiment. Now that the S&P 500 has returned to all-time highs, the bulls can sleep a little easier knowing that the market is not as frothy as it was prior to the pullback. We shared this quote from Robert Shiller a few days ago but it seems particularly applicable here – “After a stock market decline, people may perceive more risk than before when, in fact, the decline may have taken some of the risk out of the market. ”