It’s always striking how quickly a few weaker sessions in risk can take the froth off the market’s mood — and how cleanly that shows up in the sentiment data. A couple of wobbly days won’t rewrite the cycle, but they can cool the “everything is fine” temperature surprisingly fast.
Our Risk-on / Risk-off Sentiment Matters Aggregate has eased back to the 60th percentile, down from the 67th percentile (a 5-year high) only two weeks ago.
The big message hasn’t changed. Sentiment is still clearly bullish — just a bit less frothy than it was at the recent peak.
Top 3 This Week
- Sentiment: Still bullish — but less frothy.
- Cyclicals: Broad-based upgrades across sectors and factors, but still below prior peaks.
- EMD: The most bullish area in fixed income — and one of the most bullish across asset classes, even as EM equity sentiment cools.
Sentiment Overview
- A few weaker days for risk have cooled things off. Sentiment is still bullish, but back in the range we’ve been in for most of the past six months, rather than pushing new highs.
- Big picture remains the same: clearly bullish, not yet “warning sign” territory — but the hurdle rate for further upside rises when the market is already leaning one way.
- The average Risk-On / Risk-Off Heatmap indicator is at the 60th percentile: still clearly bullish, but down from 67 two weeks ago. Historically, this zone has been consistent with slightly below-average 12-month returns; sentiment becomes a clearer headwind above ~70.
- February Buy Side Sentiment Tracker: the most bullish reading in the history of the tracker (since 2024). All five risk-on/risk-off measures made new highs; equities were upgraded to 78% net bullish and cash was downgraded to a new low of -50% net bearish. The main pattern: rising appetite for cyclical exposure across asset classes, sectors, and equity factors.
- AAII: the Bull–Bear survey has cooled sharply — from +21% net bullish in January to roughly flat (as many bulls as bears) last week. That removes any near-term froth from this high-quality gauge.
- Other surveys tell a more mixed story:
- NAAIM Exposure has fallen from the 95th percentile a few weeks ago to around the 65th percentile.
- Investors Intelligence remains hot, close to the 98th percentile.
- The divergence is a good reminder why we track a broad set of indicators — it helps avoid the cherry-picking trap.
- Extremes are skewing bullish:
- Bullish (>90th percentile): 12 indicators
- Bearish (<10th percentile): 6 indicators
Equity Sectors
- Most bullish: Industrials
- Most bearish: Health Care
- Cyclicals are the story. We saw broad upgrades in the February Buy Side Tracker — and the same pattern is showing up across other sentiment indicators.
- Industrials is now the most bullish sector. A quick snapshot of the cyclical complex:
- Industrials sentiment: 2½-year high
- Materials sentiment: 5-year high
- Energy sentiment: 2-year high
- Consumer Discretionary: still the laggard, hovering near lows
- Performance is starting to catch up with sentiment — but even after the rally, cyclical sentiment is still below prior peaks. Past cycles pushed Industrials and Materials much higher (e.g., 2021 and 2016).
- Consumer Staples: showing early signs of life. CFTC positioning has improved from recent lows alongside better performance. Sentiment remains bearish overall — which means no sentiment headwind if outperformance continues.
- Tech: slips another spot. After eight months at the top, it’s now 3rd. Underperformance is finally showing up in sentiment: at the 67th percentile, the Tech SMA is ~10 points below its start-of-year high. Still, this is not capitulation — far from it.
- Utilities: remains popular. The average indicator has climbed from the 40th percentile (Dec) to around the 70th. Performance is narrowing the gap, but it’s still a tricky macro setup for a defensive leader.
Equity Regions
- Most bullish: Europe
- Most bearish: China
- EM + China: sentiment continues to drift lower despite strong recent performance. The more interesting development is the widening divergence: China sentiment is rolling over more decisively than broader EM. The same split shows up in February buy-side data.
- Bigger picture: both are still at or above their 5-year averages.
- Bottom line: no sentiment obstacle to the EM rally continuing.