After a week of geopolitics dominating the tape — and everyone suddenly becoming an expert on the Strait of Hormuz — it’s no surprise sentiment has cooled. In moments like this, the temptation is to stay glued to every headline and every intraday twist in the “war → markets” narrative. But how much edge does that really give you? Can you genuinely out-forecast the next turn in the story?
For me, this is exactly where sentiment analysis earns its keep. You can’t anticipate the next shift in the narrative — but you can do three practical things:
- Know the historical baseline for how markets behave around spikes in geopolitical stress
- Spot extremes developing in sentiment and positioning (where vulnerability builds)
- Find neglected ideas while attention is dominated by geopolitics
The baseline is simple: markets tend to price a geopolitical risk premium during stress spikes — and that premium has historically mean-reverted. That’s why “buy the geopolitical dip” is often good advice, especially over short tactical horizons (~1 month), less so over 6–12 months. The Geopolitical Risk Index (GPR) is a good yardstick here: when GPR > 300, forward 1-month equity returns averaged ~4.75%, and were above average ~85% of the time.
Against that backdrop, our Risk-on / Risk-off Sentiment Matters Aggregate has dropped to the 56th percentile — down from 62 last week and from the 67 five-year high in January. That’s the lowest in four months, but it’s far from panic. For context, sentiment fell to the 29th percentile during the Liberation Day sell-off.
In volatile markets, though, a high-frequency gauge like the VIX often captures mood shifts better than an aggregate. This morning’s brief spike to 35.24 nudged it into “historical buy signal” territory. A VIX above 35 has historically been followed by an average S&P 500 return of ~28% over the next year, with a ~90% hit rate of above-average returns.
Top 3 This Week
- Sentiment: Less bullish — but still far from bearish.
- Geopolitics: Outsized price and sentiment moves create vulnerability — especially when driven by a single unpredictable factor.
- Technology: Finally some signs investors are backing away from their bullish Tech views. A healthy development — but still far from capitulation.
Sentiment Overview
- Several surveys actually ticked up this week (AAII, Investors Intelligence, NAAIM). But the overall message remains: the divergence between surveys is unusually large — and yet the bottom line is pretty boring: all are broadly consistent with average forward equity returns; none are at historical extremes.
- The US exodus still shows up in ETF net issuance. The trend remains away from the US. This week’s data will be a good check on whether geopolitical stress has changed that pattern.
- Extremes are skewing bullish, but less than before:
- Bullish (>90th percentile): 14 indicators (unchanged)
- Bearish (<10th percentile): 8 indicators (vs 4 last week)
Equity Sectors
- Most bullish: Utilities
- Most bearish: Health Care
- Tech: a meaningful drop in Tech sentiment. Our Tech SMA fell from the 90th percentile last week to the 76th percentile — the least bullish since July — but still the 2nd most bullish sector. After months of underperformance, it’s healthy to finally see the bullishness fade a little. We’re still far from capitulation, but the process has begun.