Investor sentiment has continued to cool as risky assets have drifted slightly lower.
This is a typical pattern. A rally to new highs breeds bullishness, sometimes excessive bullishness. But sideways or slightly weaker markets allow that excitement to fade relatively quickly. A bit like the holiday feeling disappearing surprisingly fast once you are back at your desk.
We see that particularly clearly in our high-frequency RoRo indicator, which has dropped back to 58.7.
That still qualifies as bullish sentiment, but the extremes of early August have been replaced by, at most, moderate bullishness. That rings no warning bells and suggests sentiment should play only a secondary role in determining overall risk appetite.
The shift is well illustrated by the AnimusX DAX Sentiment Now survey. Around the market peak, investor bullishness reached the 96th percentile. In the latest survey, that has dropped all the way to the 15th percentile.
That now points to outright bearishness, but sentiment is still some way from the levels that have historically been associated with significantly above-average future equity returns at a high hit rate.
As always, though, there have been much larger moves beneath the surface.
Looking at the biggest sentiment swings since the market peak in mid-August, the largest increases are mostly idiosyncratic stories: Bitcoin, the Kiwi dollar, oil, precious metals and EM equities.
At the other end of the spectrum, several fixed income assets have seen sentiment deteriorate sharply, led by Treasuries. Value and Brazilian equities have also seen large declines in their sentiment indicators.
Top 3 This Week
1. Sentiment: the froth is gone
Investor sentiment has cooled sharply and is now, at most, moderately bullish.
2. Technology SMA near all-time highs
Sentiment has risen alongside recent outperformance and is now close to all-time highs. Not an immediate sell signal, but a clear reason to re-test the long Tech case and make sure conviction remains high.
3. Gold: getting hot again
Bullish sentiment is building again across indicators, pushing our SMA back to the 96th percentile. Not quite at recent extremes, but close enough to become an increasing warning sign.
Sentiment Overview
The four weekly surveys we track are starting to send diverging messages again.
That once more highlights the importance of looking at the breadth of the data rather than simply selecting one favourite indicator.
- NAAIM Exposure (bullish) shows active investment managers still reporting significantly above-average equity exposure. At the 84th percentile, it is clearly bullish but remains some way from historical extremes or sell thresholds.
- Investors Intelligence (bullish) shows even greater optimism, at the 87th percentile. But again, not yet at levels that have historically sent a warning signal.
- AnimusX (bearish) is often more volatile than the other surveys and has dropped from near its historical sell threshold at the 95th percentile a month ago to the 15th percentile today. A very large and rapid shift, but still not at the historical buy threshold.
- AAII Bull-Bear (bearish) also declined this week. With slightly more Bears than Bulls, it now sits at the 32nd percentile. At most moderately bearish.
STAX, a US retail sentiment indicator based on Schwab client activity, also declined from its most bullish level since 2021.
At 57.5, the indicator still suggests retail investors are more bullish than average, but nowhere near the historical extremes reached in 2017 and 2021. We put the historical sell threshold at 68.
NY Fed consumer stock expectations show a similar pattern: down from a recent peak.
US consumers now see a 40.9% chance that stocks will be higher 12 months from now, down from 41.4% the previous month and only very slightly above average.
The historical buy threshold sits around 35%, while this has not been an indicator that has generated consistent sell signals in the past.
Asset Class Highlights
EU equities show an unusual divergence between returns and sentiment.