A week of equity weakness has left its mark on investor sentiment.
Though the S&P 500 is only 2% off its highs and the Nasdaq 6%, our high-frequency Risk-on Risk-off index has dropped back into neutral territory.
The average indicator in the index is at its 54th percentile. That’s about as neutral as it gets. Historically, readings at this level have been followed by average S&P 500 returns over 1, 3, 6 and 12 months, with hit rates for above-average returns just above 50% across all horizons.
Where does that leave us?
- Any froth has been wiped out.
- Sentiment has reset to neutral.
- Outright bearishness—and something akin to a historical buy signal based on sentiment alone—would require a significantly greater sell-off.
- But if your macro outlook remains broadly in line with the consensus of at least decent global growth ahead, this is becoming a sentiment setup that supports a risk-on stance.
Top 3 This Week
1. Sentiment: Back to Neutral
A broad range of indicators shifted towards neutral over the past week. No signs of outright bearishness yet, though.
2. Tech: Vulnerability
Weakening momentum combined with still very bullish sentiment—an SMA of 95—is still a warning flag heading into earnings season.
3. Brazil: Mixed Messages
Foreign investors have piled back in since the first round of the election. Individuals and institutions have been net sellers.
Sentiment Overview
Implied volatility is typically the first place a shift in sentiment shows up, and this time was no different. The VIX jumped from 15 to 20 over the week.
That sounds like a big move, but it’s not remarkable by historical standards. A VIX at 20 has historically been consistent with average S&P 500 returns over the next month, quarter and year. So it fits our neutral sentiment view.
The VIX starts to become interesting as a potential buy signal at around 35, ideally 40. Those are the levels where subsequent average returns and hit rates have been significantly above average. Keep them in mind for now.
The picture is similar for many put/call ratios: up significantly over the past week, but still far from levels that have historically been reliable buy signals.
As is typical when sentiment is neutral, the surveys paint a mixed picture. NAAIM Exposure and AAII Bull Bear both ticked down towards greater bearishness. But last week’s outlier, the AnimusX DAX sentiment survey, jumped out of bearish territory and back to neutral. Investors Intelligence, meanwhile, remains at the 94th percentile—in full-on bullish mood.
As always, unless the surveys show a unified picture of bullishness or bearishness, it’s best not to read too much into any single one.