Last week’s correction pushed investor sentiment into net bearish territory for the first time since June.
Our high-frequency Risk-on/Risk-off SMA, which uses inputs that refresh at least weekly, has dropped to 48.6. The Risk-on/Risk-off Heatmap below reflects this shift well.
A few numbers provide some context:
- The average indicator making up the index is now below the 50th percentile.
- Only eight of the 52 indicators in the overall index remain above the 90th percentile. Six of these have not refreshed over the past week.
- At the other end of the spectrum, seven indicators are now below the 10th percentile, in extreme bearish territory.
- Historically, readings at these levels have been associated with slightly above-average equity returns over the following one, three, six and twelve months, with above-average returns occurring slightly more than half the time.
The key takeaway, though, is that the sell-off has so far not pushed sentiment anywhere close to a historical buy signal.
The war with Iran took our RoRo index to 32. Liberation Day pushed it to 25. Our historical buy threshold, below which equities have historically delivered particularly strong average returns at a high hit rate, sits at 29.
Today, we stand at 48.6.
I would characterise investor sentiment as very slightly bearish. And nowhere near a historical buy signal based on sentiment alone.
That does not mean this cannot be an attractive setup for adding risk. But such a call would have to be driven predominantly by factors other than sentiment. I would see sentiment as a light tailwind for a risk-on position. No more.
Getting closer to the historical buy threshold would likely require a significantly greater sell-off. And most likely one that extends beyond Tech.
Tech and the AI trade have taken the brunt of the selling so far. Yet, from a sentiment perspective, we still struggle to find much evidence of outright bearishness, let alone capitulation, anywhere in the data we track.
More on this in the Asset Class comments below.
Top 3 This Week
1. Sentiment: Slightly bearish, but no historical buy signal
Our high-frequency RoRo Index has dropped to its lowest level since June, moving slightly into net bearish territory. But at 48.6, it remains a long way from the historical buy threshold.
2. Tech: Prices have fallen. Sentiment has barely budged.
Our Technology SMA remains at the 99th percentile. High-frequency indicators are beginning to reflect more bearishness, but nowhere near the extremes that have historically preceded sustained Tech outperformance. Deeply rooted AI optimism may be keeping sentiment unusually resilient.
3. Commodities: Bullishness is fading across the board
Our aggregate Commodities SMA has fallen from the 80th to the 55th percentile since September. Even Industrial Metals are showing signs of weakening sentiment, while Soft Commodities have reached extreme bearish territory.
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 16 to 28 late last week.