The Christmas lights are switching on, the markets smell of mulled wine, and we’ve added a few gifts of our own. This week sees a major upgrade to our Fixed Income toolkit: new Heatmaps powered by 120+ sentiment indicators across sovereigns, credit and EM debt. As we head into the final stretch of the year, here’s how sentiment is shaping up.
Top 3 This Week
- Sentiment: hotter than last week, but still a supportive setup for risk assets into year-end.
- US equities: the biggest mover — not bullish, but clearly less bearish.
- Copper: sentiment keeps climbing, nearing the most bullish readings in two decades.
Sentiment Overview
- After a strong start to December, the backdrop for risk assets into year-end remains supportive. As long as macro conditions stay constructive, sentiment isn’t yet a headwind to further upside.
- But rising markets have nudged sentiment deeper into bullish territory — meaning the “runway” before sentiment turns into a concern is shorter than it looked a week ago.
- Equities are back near the highs, but sentiment has not fully followed. The gap has narrowed, yet sentiment still sits below previous peaks.
- With investors drafting their (mostly optimistic) 2026 Outlooks — and wanting to be positioned for early 2026 — the sentiment backdrop should continue to support risk-taking into year-end.
- Our SMA has risen to 61, up from the mid-50s after the correction, but still below the October high of 65. Historically, this zone tends to map to slightly below-average 12-month returns, without a strong directional tilt.
- AAII Sentiment Survey: back into net-bullish territory, its highest in 10 months. Importantly, it remains far from levels that have reliably signalled equity market tops; historically, this zone has been followed by slightly above-average 12-month returns.
- AAII Asset Allocation Survey: flashing early warning signs. Equity allocations at 71%, bond allocations down at 14%, cash near 25-year lows — all approaching, but not yet at, historical sell thresholds.
- At the extremes, we now see far more bullish indicators than bearish ones.
- Bullish (>90th percentile): 12 indicators — mainly slower-moving monthly series, plus equity put/call ratios, Nasdaq 100 put/call, net call volumes, and Market Directional HF beta.
- Bearish (<10th percentile): only 5 indicators, mostly uncertainty indices plus money-market flows.
- CFTC reminder: data is being republished after the shutdown; historical backfill won’t be complete until 23 January 2026.
Equity Sectors
- Most bullish: Communication Services
- Most bearish: Health Care
- Health Care has bounced in performance, but sentiment remains at the bottom. The buy-side tracker, Schwab flows, and sector ETF market share all sit below their 15th percentiles. We get new Schwab data soon, so it will be interesting to see if retail responds to higher prices.
- Materials sentiment slipped one spot this week but remains one of the biggest improvers in recent months — from the low-20s percentile to ~46 now. Not bullish yet, but a meaningful shift captured across multiple indicators.
- Tech-linked sectors continue to dominate sentiment. Technology and Communication Services are the only sectors with average indicators meaningfully above the 50th percentile.
- Communication Services leads: average indicator now at the 85th percentile — the highest in 15 years. (With the caveat that the sector composition today differs significantly from the Telecom-heavy eras of the GFC and TMT bubble.)
- Utilities: a small rebound above 50, but the broader downtrend since May remains intact. US Utilities have underperformed meaningfully; Europe has been flatter. Sentiment gives no clear direction here.
- With Utilities no longer offsetting weakness in Health Care and Staples, Defensives as a group look genuinely unpopular. The gap between Defensive and Cyclical SMAs is near the widest in a year.