It’s been a turbulent few days in a few pockets of markets. But just as the precious-metals rally stayed relatively contained, so has the sell-off. Broader risk has held up well — the S&P 500 closed Friday less than 1% below its all-time high.
At the same time, sentiment has continued to grind more bullish. With equities rising slowly, the sentiment shift has also been gradual — but lots of small moves in the same direction eventually add up.
Our Risk-on / Risk-off Sentiment Matters Aggregate has reached 66 for the first time since 2021, exceeding the highs of 2024. That’s not quite at levels that have historically been followed by poor returns — but it’s getting closer to ~70, where our baseline would be to become more cautious.
Top 3 This Week
- Sentiment: Now the most bullish in five years — which means the bar for “good news” to keep pushing markets higher is rising.
- Energy sector: Outperformance is starting to follow previously bearish sentiment. But sentiment has flipped bearish → bullish and is now at its most bullish level in two years.
- New Zealand Dollar: price action is finally starting to move off those very bearish sentiment levels.
Sentiment Overview
- Overall sentiment is drifting gradually more bullish and has made a new 4-year high. The big-picture message: sentiment is clearly bullish.
- These aren’t quite “warning sign” levels yet, but the hurdle for incremental good news to push markets higher is rising.
- The average Risk-On / Risk-Off Heatmap indicator sits at the 66th percentile: clearly bullish. Historically, this zone has been consistent with slightly below-average 12-month returns; sentiment becomes a clearer headwind above ~70.
- AAII Asset Allocation Survey: cash allocations fell again — now the lowest in four years. At 14.42%, it’s creeping toward the historical “sell threshold” of ~14%; below that, average 12-month equity returns have been around 0%, with below-average returns ~74% of the time.
- US Policy Uncertainty: nudged up marginally in the January release. It remains well above the historical “buy threshold” and is one of the few indicators still pointing to bearishness.
- Institutional money market fund assets: shrinking month-on-month for the first time in 7 months. Still far from a signal, but it has moved from “bearish with big inflows” back toward neutral.
- US consumers’ stock market expectations: dipped slightly from a high level, even as consumer confidence ticked up. A small step toward closing one of the more “K-shaped” patterns: consumers very optimistic on stocks while pessimistic on their own economic prospects.
- Extremes are skewing bullish:
- Bullish (>90th percentile): 13 indicators
- Bearish (<10th percentile): 4 indicators (last week 6)
Equity Sectors
- Most bullish: Technology
- Most bearish: Health Care
- Tech remains top-ranked, but the tension persists: very bullish sentiment alongside relative underperformance. Earnings season has added volatility, but hasn’t reversed the underperformance trend.
- Tech remains vulnerable from a sentiment perspective, as discussed in a recent Sentiment Ideas note (website).
- Communication Services: almost the mirror image of Tech — sentiment has taken a hit, but earnings season performance has been solid so far. The average indicator is now below the 50th percentile, the lowest since April.
- 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.
- Energy: some outperformance has followed improving sentiment, though the gap is still large. SMA has rebounded from 26th → 62nd percentile (bearish → bullish). Sentiment indicators are at their most bullish levels in 2 years — one to watch given cyclical exposure.
- 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.
Equity Regions
- Most bullish: Europe
- Most bearish: Brazil
- EM + China: sentiment continues to drift lower — a meaningful shift from the broad bullishness in autumn. That said, EM sentiment remains toward the bullish end of the 5-year range.