Back from Japan and back to a full Heatmap Update this week. It’s a fantastic place — great food, culture and nature, and a place that offers endless new experiences.
With equities moving sideways for an extended period, the euphoria typically starts to fade. We quickly get used to what not long ago were all-time highs.
That pattern has come through in our Sentiment Matters Risk-on/Risk-off aggregates as well. Both of our Risk-on/Risk-off SMAs, high-frequency and all-in, have been drifting lower, but remain well above average and not far from their five-year highs.
That leaves our RoRo indicators at levels that have historically been associated with slightly below-average equity returns over the following one, three, six and twelve months, with below-average returns occurring slightly more than half the time.
So there is still no strong signal on overall risk-taking from the sentiment side. I would score sentiment as a negative factor in determining risk appetite, but not a dominant one.
Other factors would still need to do the heavy lifting. If you have a particularly bullish macro outlook, sentiment is not so bullish that it would likely cancel that out. If your macro view is bearish, sentiment can provide some modest support for that case.
As always, though, there have been larger moves beneath the surface.
Top 3 This Week
1. Sentiment: drifting lower, but still bullish
Investor sentiment is still clearly bullish, but equities trading sideways for a month tends to take some of the froth out of the indicators.
2. EM sentiment getting warm, not hot
The strong run since late July has pushed our EM equity SMA from its 30th to the 60th percentile. Sentiment remains broadly neutral, but is no longer a clear tailwind.
3. Kiwi Dollar: no longer the most hated currency
Our SMA has rebounded from an all-time low in late June to the 37th percentile, its least bearish level in a year. Sentiment is becoming less supportive, but remains far from a meaningful headwind.
Sentiment Overview
Some of the extreme divergence across the surveys has moderated, and the overall survey average now skews bullish. AAII remains the most bearish outlier.