Another weekend spent poolside at the County Swimming Championships — cheering, watching tight races decided by hundredths, and being reminded how quickly the mood shifts when someone kicks early or times a turn perfectly. There's a lesson for markets however you spend your weekend.
With equities grinding higher over the past few months, it’s not surprising sentiment hasn’t broken out to fresh highs. Investors adapt quickly: yesterday’s “wow, new highs” becomes today’s “normal.” The second (or third) time markets revisit an old all-time high, it’s much easier to take for granted. In practice, it usually takes a sharper, faster rally than we’ve seen to push sentiment into truly worrying territory.
Top 3 This Week
- Sentiment: Grinding more bullish— but still no sign of true extremes
- Consumer sectors: Very bearish sentiment, but potentially interesting if the “run it hot” theme keeps running
- Mexican Peso: Most bullish FX sentiment — highest in two years, but not at the decade’s repeated peaks
Sentiment Overview
- Overall sentiment is drifting gradually more bullish and sits near the upper end of the last six months’ range. Still best described as moderately bullish / cautiously optimistic — below the sentiment ranges of 2024, 2021/22, and the pre-pandemic period.
- This remains supportive for risk assets as long as macro conditions stay constructive — consistent with the grind-higher equity pattern and broadly average returns.
- The average Risk-On / Risk-Off Heatmap indicator is at the 63rd percentile: clearly bullish, but not “one-way” positioning. Historically, this zone has been consistent with slightly below-average 12-month returns; sentiment becomes a clearer headwind above ~70.
- AAII Bull-Bear has cooled from the most bullish reading in over a year. At +10% net bullish, it’s in a “no-man’s land” range that has historically been followed by average 12-month returns. Bigger red flags typically show up above ~35% net bullish.
- The Geopolitical Risk Index briefly spiked on Greenland concerns, hitting 296 on Monday — just shy of the 300 level that has historically been a buy signal.
- Extremes are skewing more bullish:
- Bullish (>90th percentile): 13 indicators (14 last week)
- Bearish (<10th percentile): 6 indicators (unchanged)
Equity Sectors
- Most bullish: Technology
- Most bearish: Health Care
- Tech remains top-ranked, but the tension continues: very bullish sentiment alongside relative underperformance.
- We highlighted Tech’s extreme sentiment and potential vulnerabilities in last week’s Sentiment Ideas note (see website).
- Earnings season is the next big cross-check: do results match expectations, and do investors still have the appetite to price Tech on the future rather than the present?
- Communication Services sentiment has dropped sharply — from a 15-year high (October) to its lowest in seven months. The average indicator is now near the 50th percentile: mid-pack and roughly neutral.
- Cyclicals: popularity continues to drift higher — and now performance is catching up, with rallies in Materials and Industrials.
- Cyclical sentiment remains well below past peaks, so the “run it hot” rally isn’t yet facing a major sentiment headwind. Cyclicals aggregate: 53rd percentile vs 59 (2023), ~60 pre-pandemic, and 85 post-reopening peak.
- Consumer Discretionary + Consumer Staples: both remain deep in bearish territory. If “run it hot” persists, the consumer space could offer opportunities from a bearish starting point.
- Energy: some outperformance has followed improving sentiment, though the gap is still large. SMA has rebounded from 26th → 57th percentile (bearish → bullish). One to watch for cyclical exposure.
Equity Regions
- Most bullish: Europe
- Most bearish: Japan