Key takeaway: Record highs in equity indexes buoy investor sentiment that has remained optimistic without a significant challenge over the past year. Bulls ticked higher across our sentiment indicators last week, yet we still see evidence that risk appetite is turning (NAAIM Exposure Index, NASDAQ trading volume, overall levels of options activity). These new highs and levels of optimism must contend with the undercurrents of lackluster breadth measures and an absence of pessimism. Risks lie just beneath the surface. This raises the possibility of a more complete sentiment unwind when risks are realized and prices begin to falter.

Key takeaway: Last week’s volatility unwound some near-term complacency, but there is still plenty of evidence of optimism in the system. Active managers increased their equity exposure and equity ETFs continue to attract inflows at a staggering pace (though certain sectors are starting to see outflows). A more challenging breadth backdrop poses a challenge, but with economic data continuing to surprise to the upside and earnings expectations being revised higher, excessive optimism may be slow to unwind. While risks are elevated from a sentiment perspective, they are not yet being manifested in terms of price. 

Key takeaway: Excessive optimism has been slow to unwind and most of our indicators are back to signalling a high risk environment from a sentiment perspective. Individual investors last week showed the fewest bears since January 2018. While complacency abounds, investor risk appetite remains shy of where it was in March, even with the uptick in speculative activity over the last two weeks. Liquidity conditions have been tightening of late and momentum trends are diverging from price trends. While the apple cart has not been upset, the load is perched precariously and one small stumble could send fruit flying in all directions. It’s not a low-risk load on which to ride.