Key takeaway: Investor optimism has been unwinding even as indexes have moved into record territory and breadth remains strong (NYSE new high list at its highest level since 2004). This week’s featured chart shows the spread between institutional and individual sentiment collapsing. This has tended to occur ahead of market strength, not weakness. While the risks from a strategic positioning perspective are undiminished (especially in the context of valuations and household equity exposure), the short-term and intermediate-term sentiment picture has improved in recent weeks as optimism has come off the boil. It looks to me like investor sentiment has moved off of the risk side of the scale and the weight of the evidence is turning more constructive not more cautious.

Key takeaway: Sentiment shifts last week seemed more reflective of weakness in the headliners than the new weekly closing highs in the equal-weight S&P 500. This is a healthy development, especially for active investors who are seeing the market coalesce around a new leadership group while optimism comes off a boil. For passive investors, the pain of loss is more acute. This risk for the market overall is that diminished optimism morphs into more meaningful pessimism and breadth digestion turns to sustained deterioration. We have not seen that. Even as options data shows more concern and weekly sentiment surveys turn more neutral, fund flows continue to display optimism. When this reverses, risks are likely to rise. From a strategic positioning perspective, risks are elevated and passive investors may just be starting to feel uncomfortable.