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Is the Stock Market Making a Top?

Stock markets have seen wild swings in the last little while. If you are a stock investor, you could be questioning where the stock market is headed next. Over the last few days, the swings have really taken a toll on investor sentiment.

Going forward, investors need to pay attention to a few things….

First, there’s a lot of noise that says we could be making a top on the stock market.

Is this true?

It’s very possible, but keep in mind that tops and bottoms are very difficult to predict. We only know them once they are in place.

Why could we be seeing a top?

You see, market tops are usually made at the time of peak prosperity, just before the economy is about to enter a slowdown.

Consider the stock market top of 2007. The Dow Jones Industrial Average was forming a top between July and October of 2007. At this time, we were seeing solid numbers about the economy. The recession began near the end of the year.

If we assume that the U.S. economy could be slowing down in the coming quarters, then the recent price action on the stock market is saying that we could be forming a top. Obviously, with time, we will know more.

Those with Money Ditching the Stock Market

Then, know that those with money are ditching the stock market.

Please look at the chart below of the National Association of Active Investment Managers (NAAIM) Exposure Index. This index essentially tells us what percentage of active managers’ portfolios consists of stocks.

Chart courtesy of StockCharts.com

In mid-December 2017, active managers’ portfolios were 109% stocks. This means they borrowed money to buy stocks.

Now, their portfolios are 56.8% stocks. In other words, money managers have reduced their stock exposure by over 50%.

At its core, active managers ditching stocks says that they are nervous and don’t expect much from stocks. This is a warning sign that shouldn’t be ignored.