As we enter week five of the war with Iran, geopolitics is still driving the headlines — and markets. Our approach stays the same:
- It’s more useful to ask how much stress is already priced in than to try to predict the next twist in the news flow.
- Two layers matter: geopolitical stress and market stress.
Broadly, the focus is shifting from the first to the second. Geopolitical stress hit extremes almost immediately. Market stress has been building more gradually.
On the geopolitical side, we got the “buy the risk premium” signal straight away. The Geopolitical Risk Index (GPR) spiked to 565 — miles above the historical buy threshold at 300. Since then, it has done what it usually does: it fades as the initial shock wears off. Unless there’s escalation, people adapt. The original GPR will update later today, but the new AI-based series already runs through Friday and shows the continued easing.
Market stress, meanwhile, has kept building. I’d describe investors as bearish, but not excessively bearish — and not yet at the kind of historic extremes that have been reliable buy signals. For context, sentiment was significantly more bearish this time last year after Liberation Day. My best guess is still that we’d need another high-volume, big down day to push a broader set of risk-on/risk-off indicators into clear investor bearishness.
To help track sentiment when markets are moving quickly, we’ve added two new features to the Sentiment Matters Toolbox:
- High-Frequency Risk-On / Risk-Off Indicator (Quick SMA)
A new version of our aggregate built only from daily and weekly indicators. You lose some detail from slower monthly series — but you get a faster read on how mood is adjusting to sharp moves. I use the Quick SMA as the live read, and then cross-check the slower aggregate for confirmation.
- Live Charts
We’ve also added live versions of two of our most useful big-picture tools:
- the Risk Assets Heatmap, and
- the Risk-On / Risk-Off SMA
Both refresh automatically as new data comes in. You’ll find the live Quick SMA and Live Charts in the Toolbox section of the website (for subscribers).
On the numbers: our original Risk-on / Risk-off SMA has stayed around 52 — the lowest in eight months, but little changed from last week. Some indicators (implied vol) show more stress; some surveys have moderated a touch. Still nowhere near the historical “buy” zone around 30.
The new high-frequency Quick SMA shows a bigger shift: the average daily/weekly indicator is down to the 42nd percentile. More bearish, yes — but again, not close to 30.
The best real-time gauge in setups like this remains implied volatility, especially the VIX. At 31 as I write, it’s closing in on the historical buy threshold of 35 — where forward returns have historically started to skew meaningfully above average. A VIX between 35 and 40 has on average been followed by a ~22% rise in the S&P 500 over the next year, with above-average returns ~87% of the time.
Top 3 This Week
- Sentiment: Getting more bearish — but not yet extreme.
- Oil / Energy: Energy SMA at the 85th percentile (a 17-year high). Be careful.
- Europe & Cyclicals: Both look like interesting candidates to watch once geopolitics fades into the background.
Sentiment Overview
- Big picture: most bearish in 8–10 months. The average indicator is near the 50th percentile; the average high-frequency indicator is nearer the 40th percentile. Neither is at a clean aggregate buy signal.