Sentiment is getting more bullish, but without becoming extreme.
The bigger change this week is underneath the surface. The unusually large divide within risky assets is starting to close.
For the past two months, we repeatedly highlighted the extreme preference for secular growth over cyclical growth. That gap has narrowed sharply as Tech has taken a breather and Cyclicals have played catch-up.
As a result, sentiment indicators now tell a more unified story of moderate bullishness.
Both the high-frequency and all-in versions of our Risk-On/Risk-Off aggregates have moved higher and now sit just below 60. That takes them back to the highs reached during the April rally.
But they remain well below the levels in the mid-60s seen earlier this year, before the war with Iran.
So the overall message remains constructive: sentiment is becoming more bullish, but we are not yet back at the extremes that would suggest greater caution.
Top 3 This Week
1. Sentiment: back to bullish
Investors are the most bullish since the start of the war with Iran, but sentiment remains well below pre-war extremes.
2. Fixed income bearishness getting extreme
Sentiment across fixed income remains deeply bearish despite improving momentum.
Sovereigns and High Yield are below their historical buy thresholds, while the Sovereigns SMA is approaching levels last seen in 2022.
3. US equities back on top
US equities are now the most popular region, completing a remarkable sentiment comeback. But with the SMA at the 94th percentile, the contrarian signal has shifted towards vulnerability.
Sentiment Overview
The surveys paint a mixed picture and, overall, have moved against the broader trend. AAII and NAAIM have both shifted less bullish or more bearish. Only Investors Intelligence Bull-Bear shows greater bullishness.
- AAII Bull-Bear fell back to -11% net bearish. By historical standards since 1987, that is actually a pretty bearish reading. It has only been lower 17% of the time.
- But the bigger picture is that the AAII Bull-Bear spread has spent most of the past year in a relatively narrow range between -10 and +10. The practical conclusion is that there are no strong signals coming from the survey at these levels.
- NAAIM Exposure had been the survey showing the greatest bullishness since March. But last week’s drop to the 73rd percentile takes it back towards neutral. Historically, that has been consistent with slightly above-average equity returns ahead.
- Investors Intelligence Bull-Bear had been relatively stable for several months but has accelerated over the past few weeks. It is now the survey showing the greatest bullishness.
- At +38% net bullish, it sits at its 89th percentile. But for context, it has been higher several times over the past three years. It is getting closer to levels worth paying attention to, but needs to take another step up before becoming a meaningfully negative signal.
- Once again, the divergence between surveys and the week-to-week volatility within each one highlight the importance of looking at a broad set of sentiment indicators and avoiding the cherry-picking trap.
The monthly AAII asset allocation survey showed another drop in cash levels. The war-related bounce has now almost fully reversed and, at 14.6%, cash allocations are getting very close to the historical sell threshold at 14%.
- Equity allocations saw the largest increase and now stand at 71%, but remain well below the historical sell threshold at 75%.
Net outflows from US domestic equity funds go some way towards putting the previous week’s record inflows into perspective.