If you only looked at the S&P 500, you might think it had been a relatively quiet few months. The index has moved largely sideways and is now roughly where it was in mid-May, mid-June and mid-July.
But it hasn’t felt that way.
There has been a lot of action beneath the surface. Rotation!
Even after the end-of-week rebound, Technology has given up most of its stellar April and May outperformance. Emerging Market equities have seen an even greater reversal, falling to year-to-date relative lows last week.
On the other side, previous underperformers such as Value, Brazil and Health Care have rallied. Even the Consumer sectors have shown signs of life, while Financials have enjoyed their strongest run of outperformance in two years.
Big shifts in relative prices like these bring about equally significant shifts in investor sentiment and expectations.
From my perspective, that raises an important question: where does this leave sentiment, both at the overall market level and beneath the surface across sectors, regions and styles?
Firstly, at the market level, in terms of broad investor risk appetite, not that much has changed. Just as the S&P 500 has remained in a sideways pattern, our Risk-On/Risk-Off SMAs continue to show a picture of moderate bullishness.
Sentiment is net bullish, but at no point over the past few months has it reached worrying extremes. The average indicator within our aggregates currently sits around the 55th percentile.
Beneath the surface, however, several changes stand out.
The biggest sentiment losers are dominated by fixed-income assets, including Treasuries and Linkers, but also include equity regions such as Emerging Markets and Europe.
On the other side, the assets where sentiment has taken the most bullish turn are led by Value and the value-adjacent Financials sector. Oil, Brazilian equities and GBP are close behind.
The move in GBP may be driven largely by idiosyncratic factors. For the others, however, the improvement is to a significant extent a side effect of the rotation out of Technology.
Notable for its absence from the biggest sentiment losers is Technology itself.
Technology has led the underperformance, but investor sentiment has been much slower to sour. The contrast with Value is particularly striking. Value is, in many ways, the inverse of Technology and Growth, and its sharp improvement in sentiment shows how investors have responded elsewhere to the shift in relative performance.
As Technology has weakened and Value has outperformed, you would normally expect sentiment towards the two styles to adjust in opposite directions. That has clearly happened in Value, where our SMA has moved from a multi-year bearish extreme back into net bullish territory. But the corresponding deterioration in Technology sentiment has been much more muted.
To me, this highly unusual disconnect demonstrates the strength of the underlying structural bullishness towards Technology and AI. The rotation has been powerful enough to make investors more optimistic about Value, but not yet powerful enough to make them meaningfully less optimistic about Technology.
Once you have committed to a theme, written blogs about it, talked to the press about it and launched funds targeting it, it becomes increasingly difficult to turn bearish.
Over the past few years, this has not prevented swings in Technology sentiment, but more often than not they have been delayed compared with other assets. Our Technology SMA did eventually correct significantly before previous bottoms, but we have not yet seen that kind of adjustment this time.
Technical events such as last week’s unwind of the Situational Awareness fund add to the anecdotal evidence that some excesses have been removed.
So far, however, we have not reached the point where a broad range of Technology sentiment indicators has corrected.
Top 3 This Week
1) Sentiment: Slightly Bullish
More noise than index-moving action. Rotation has shifted sentiment significantly beneath the surface, but much less at the overall market level.
2) Technology Conundrum
Despite weaker performance, Technology sentiment indicators remain close to bullish extremes. There is no sign in our data that bullishness towards the sector has washed out.
3) Value Reversal
Our Value SMA has been the biggest riser over the past few weeks. While Technology sentiment still looks remarkably bullish, its opposite has also become more popular, moving from a multi-year bearish extreme back into net bullish territory.
Sentiment Overview
The weekly surveys are painting a broadly neutral sentiment picture.