The overall investor sentiment picture continues to be one of moderate bullishness.
The gradual grind higher in the S&P 500 has so far not triggered any signs of extreme or worrying bullishness.
I like to look at the chart of our high-frequency Risk-On Risk-Off aggregate against the S&P 500 to get some perspective. It shows how quickly sentiment can shift from bullishness to bearishness during equity pullbacks, but also how much more gradually bullishness builds as equities rise.
It also shows that extended periods of only modest equity gains tend not to create the extremes in investor bullishness that have historically been associated with poor subsequent equity returns.
So, for now, we are left with a sentiment setup that remains constructive if your macro view is broadly in line with the consensus of at least decent global economic growth ahead. Sentiment may be a small headwind for returns, but at these levels it should not dominate an otherwise constructive macro outlook.
Top 3 This Week
1. Sentiment: Moderately bullish
Sentiment remains constructive if your macro view is broadly in line with the consensus of decent global economic growth ahead.
2. Tech: Bullish sentiment near all-time highs
Our SMA remains around bullish extremes, near all-time highs. The earnings season will be the next test of reality versus expectations.
3. India: Least bullish in 3 years
Underperformance is finally being reflected in investor sentiment as well. Indian equities are starting to look increasingly interesting from a sentiment perspective.
Sentiment Overview
STAX, a US retail sentiment indicator based on Schwab client activity, rose this month.
At 58.9, the indicator 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, so there is still some way to go. Overall, STAX is consistent with other retail sentiment indicators suggesting moderate bullishness.
AnimusX's DAX Sentiment indicator, meanwhile, dropped into very bearish territory this week. At -35, it has only been lower in 13% of weeks since 2004. This is the lowest reading in the past few years, outside the sell-offs around Liberation Day and the start of the war with Iran.
While this clearly goes against the broader picture of moderate bullishness, it is still a level that has historically been consistent with average equity returns ahead. It is also currently an outlier among the weekly surveys.
In fact, the AnimusX survey contrasts with the improvement we saw this week in the previous outlier, the AAII Bull-Bear survey. The AAII survey bounced back to one of its most bullish readings in the past couple of months, with Bulls slightly outnumbering Bears for the first time in six weeks.
As we always stress, these differences highlight the importance of looking at a wide range of indicators rather than falling into the cherry-picking trap of following whichever indicator best suits your existing view.
Bond markets continue to be where much of the excitement is at the moment. Our bond sentiment indicators show bearishness, but not (yet?) at extreme levels.
From a wider risk-asset perspective, however, it is bond volatility that matters more than yield levels. Historically, a reading above 180 on the MOVE Index has been a threshold beyond which subsequent one- and three-month equity returns have been significantly worse than normal.
We are keeping an eye on the MOVE, but so far it has not come close to those levels. In fact, it even declined a little late last week.
Asset Class Highlights
With the small rebound in Treasuries, our SMA has also recovered from its lows. So far, it has troughed at 29, but is now back at 35. That still signals bearishness, but even at its worst there were no signs of panic in either price moves or our sentiment indicators.