Sentiment moves faster than prices, at least on the downside.
The S&P 500 may only be 3% off its all-time high and the Nasdaq 6%, but our Risk-on Risk-off Sentiment index already shows that earlier bullishness has given way to neutral sentiment.
The average indicator in our high-frequency RoRo index is down to the 53rd percentile, having peaked at the 71st percentile during the equity rally in August.
The shift is broad-based. Over the past two weeks, three times as many indicators moved in a bearish direction as in a bullish direction, resulting in a net downgrade ratio of 53%. Only five indicators remain above the 90th percentile. Four of those are monthly indicators that don’t yet reflect recent events.
From a sentiment perspective, that leaves us in a similar place to last week:
- 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: Neutral
Sentiment has reset to neutral, creating a constructive backdrop if your macro outlook still points to decent global growth ahead.
2. Oil: Vulnerability
Oil sentiment is almost as bullish as Energy sector sentiment. Our SMA has risen to the 87th percentile, increasing vulnerability to news flow that is less than perfect.
3. Brazil: Reversal
Foreign investors drove the Brazil rally and are now the most likely drivers of the reversal. Domestic investors remained largely on the sidelines. One to watch for signs of excessive bearishness in the days and weeks ahead.
Sentiment Overview
The latest FINRA margin debt data still looks relatively benign. Margin debt increased over the month while equities moved roughly sideways, pushing the margin debt-to-market-cap ratio slightly higher. But the ratio remains below its June high and considerably below the historical sell threshold.
This is a relatively slow-moving sentiment indicator, so it won’t capture the market moves of the past couple of weeks. For now, though, margin debt is sending no historical warning signals.
The latest ZEW analyst expectations survey offers a few messages:
- Equities: Broad equity sentiment declined marginally but remains slightly bullish.
- US versus EU: A second consecutive shift from US towards EU equities has unwound half of the pro-US shift over the previous year. This was driven more by a US downgrade than an EU upgrade. Analysts now show a moderate preference for EU equities—an outlier and somewhat at odds with recent events and returns.
- Sectors: Cyclical sectors saw net upgrades, although these were small by historical standards. Sentiment towards Steel, Engineering and consumer sectors remains net bearish, but nowhere near historical extremes.
- Technology: Sentiment is off its highs, but Technology remains the most popular sector.
- Currencies: A small net downgrade for EUR versus USD, although euro sentiment remains more bullish than dollar sentiment.
- Bonds: Bund and Treasury sentiment shifted towards neutral, with fewer analysts expecting rising rates. No sign of extreme bond bearishness.
Our four weekly surveys span the range from bearish to bullish. There is no consistent directional signal, fitting the overall neutral sentiment picture.
- NAAIM Exposure — bullish: Volatile from week to week, bouncing between neutral and moderately bullish for several weeks. Currently at the 79th percentile.
- Investors Intelligence — bullish: Now the most bullish of the four surveys. At the 89th percentile, it remains below historical sell thresholds.
- AnimusX — neutral: The most bearish survey a few weeks ago has normalised back towards neutral.
- AAII Bull-Bear — bearish: Back to counting more Bears than Bulls. By historical standards, though, the reading is not extreme enough to suggest unusual equity returns ahead.
Asset Class Highlights
Technology
- Our Technology SMA briefly dipped as the sector underperformed, but the modest decline in bullishness has all but disappeared. The ‘buy the dip’ mentality is alive and well.
- As Tech earnings season continues this week, market reactions to results will provide a useful test of whether reality and investor expectations are aligned. With the SMA at all-time highs, sentiment still suggests the risks are skewed towards disappointment.
Brazil
- Brazil has been in focus following an election result that surprised markets in the second round. Our Deep Dive in last week’s Sentiment Ideas note has already been overtaken by events.