At the headline level, risky assets have been moving sideways since May. Underneath the surface, however, market leadership has changed considerably.
Cyclicals have had a period of leading the rotation. So have Brazilian equities. More recently, Financials and Defensives have also performed well.
Given the broad range of assets involved and the changing patterns of outperformance, perhaps the clearest trend has simply been a rotation out of Tech.
The extreme rotation into secular growth peaked in early June, alongside extremely bullish readings in our Sentiment Matters Aggregates, and has been gradually unwinding since.
That picture is also increasingly visible in the sentiment data.
Big picture, investor sentiment is clearly in net bullish territory, but remains well below previous peaks and even further below the levels that have historically sent reliable warning signals.
Both the high-frequency and all-in versions of our Risk-On/Risk-Off aggregates remain just below 60. That takes them back to the highs reached during the April rally, but no further. Both remain well below the mid-60s levels seen earlier this year, before the war with Iran.
But many of the market segments that have rallied the most have also seen sentiment recover towards bullish territory the quickest.
Our Brazil SMA has bounced from the 7th percentile to the 50th percentile. Our European SMA troughed at the 9th percentile in April and reached the 68th percentile a few weeks ago, although it has given some of that back since. Financials are another standout, with the SMA rising from the 27th percentile in June to the 64th percentile today.
None of these look extreme yet. But as sentiment has recovered alongside prices, the contrarian case for rotating into them has become much less clear-cut.
Tech is the obvious exception.
Our Technology SMA has hardly budged. The latest reading is still at the 93rd percentile. Before the latest Tech rally began in April, the SMA had at least drifted back to around the 70th percentile.
So from a sentiment perspective, there is little reason yet to assume Tech has become materially less sensitive to anything other than perfect news flow.
For the rest of this week’s Heatmap note, I am trying something slightly different.
Rather than the usual full run-through of indicators and Heatmap commentary, I have gone a little deeper into one topic that has caught my eye: Trade War Risk.
Let me know whether you prefer these deeper dives into a single topic, the broader commentary across asset classes and indicators, or a mixture of both. Feedback is always welcome as I keep iterating to improve the product.
Trade wars: the next market risk?
As geopolitical risk has wound down, does that mean the end of Trump-induced market crises? Or does it simply make it more likely that attention shifts to the next source of uncertainty?