Investor sentiment continues to grind more bullish, but remains far from stretched.
While the S&P 500 is near its August highs, our high-frequency Risk-On/Risk-Off indicator is still almost 13% below its own August peak. That gap has been shrinking, but remains substantial.
Sideways equity markets tend to be consistent with sentiment drifting lower from bullish extremes, while remaining in moderately bullish territory. That is broadly the pattern we have seen over recent weeks.
It would most likely take another leg higher to new all-time highs to push sentiment back into more worrying territory.
So, for now, sentiment remains a modest headwind for risky assets, but in my framework it should not yet be a dominant driver of the risk appetite discussion.
A constructive macro outlook based on global growth remaining solid should weigh more heavily than the drag from sentiment. Likewise, if your macro outlook is bearish, sentiment can be a supporting argument rather than the main driver of a bearish risk position.
Both of our Risk-On/Risk-Off indicators are currently in the low 60s.
Historically, readings around current Risk-On/Risk-Off levels have 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.
Not a strong signal.
We also continue to expand the underlying data set. This week I have added Eurex put/call ratio indicators for Bund futures to the fixed-income Heatmaps, giving us another options-market perspective alongside the existing survey, positioning and sentiment measures.
Top 3 This Week
1. Sentiment: moderately bullish
Sentiment is more bullish than last week, but remains far from stretched.
2. Brazil: bearish sentiment into Round 2 of the election
Brazil sentiment remains deeply bearish after round one. With our SMA at the 12th percentile, close to the historical buy threshold, the set-up into round two looks increasingly asymmetric.
3. JPY: back to bullish sentiment
The JPY rally has driven a remarkable sentiment reversal. Our SMA is now in the mid-60s — the most bullish in a year, despite a relatively modest price recovery.
Sentiment Overview
The familiar picture of ‘four surveys, four messages’ remains in place.
- NAAIM Exposure (neutral) has been volatile recently and fell from the 80th percentile to the 58th percentile. We now count this as neutral.
- Investors Intelligence (bullish) has become the survey showing the greatest bullishness. Back at the 84th percentile, it remains below any historical sell thresholds.
- AnimusX (bearish) is often the most volatile of the four surveys we track here, but has been relatively stable over the past couple of weeks. At the 29th percentile, it has been drifting lower for three weeks and is now just low enough to consider bearish.
- AAII Bull-Bear (bearish) has received the most attention over the past few weeks. Respondents have shifted a little less bearish, but the survey still shows more Bears than Bulls. At the 16th percentile, it is the only survey well into bearish territory — and remains an outlier among both surveys and the broader indicator set.
US consumer bullishness on the stock market took a step back. The Conference Board survey has been showing extreme bullishness for some time, but declined this month. That brings it closer to the New York Fed survey, giving a more unified message of moderate retail bullishness. Technically, that also makes the gap in our K-shaped economy chart a little narrower, though the change is marginal.
The monthly Trade Policy Uncertainty Index ticked higher.
Trade wars are not on the market’s agenda today. But should they be?
The Trade Policy Uncertainty Index provides a useful measure of how much attention — and anxiety — the issue is attracting. It rose this month, but remains near the lows of the Trump 2.0 period, suggesting that little concern is currently reflected in the prevailing narrative around renewed use of tariffs as a tool of US policy.