Going With The Crowd Until It Reverses At An Extreme

Sentiment is elevated, risks increase when it reverses

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Key Takeaway: Momentum may be cooling but breadth trends remain resilient. Tactical risks from sentiment don't become acute until the optimism reverses at an extreme. For now we are following recent strength in Commodities and Canada.

More Context: Sector-level momentum trends are stalling (again) but sector-level breadth strength has been sticky. We are seeing this at the individual stock level as well. More stocks are making new highs than new lows and the S&P 500 has had more advancers than decliners for 8 days in a row (the longest such stretch since 10 in a row in 2017).

Recent strength has fueled optimism in stocks. That can be seen across various sentiment surveys as well as the surge equity ETF inflows in recent weeks. The NAAIM Exposure Index climbed above 100 this week for the first time since November 2021, while Consensus Bullish Sentiment is at its highest level since June 2021. Tactical risks increase when optimism reverses at an extreme. Right now it is extreme, but it hasn't reversed.

Tactical tailwinds are intact and we are seeing more evidence of improving trends. Commodities (PDBC) have climbed to their highest level in months and momentum is improving. The story is similar for Canada (EWC). Both commodities and Canada have improving trends in our relative strength rankings work and both have been  added to our discretionary Tactical Opportunity Portfolio.