Key Takeaway: Optimism has begun to cool as sentiment relieves the excesses of early summer. Yet, we are a far cry from a complete unwind that cyclical damage suggests is necessary. As investors become more risk-averse, we are looking for evidence that pessimism has become widespread and excessive (more II bears than bulls, NAAIM Exposure Index reading below 30, ETF outflows close to or below zero on a 4-week basis, and a daily close in the VIX greater than 30). Though there is certainly an increased level of caution and concern among market participants, we haven’t seen a degree of fear or pessimism in any of our indicators that point to the warranted rebalance. For now, risks remain elevated as sentiment swings toward pessimism.

Key Takeaway: Sentiment is teetering on the edge of a complete unwind. Six months of choppy markets has taken its toll on optimism and now pessimism is starting to move higher. This week’s II data could just be a shot across the bow in terms of a more cautious stance from investors, especially if the struggles seen beneath the surface make their way to the S&P 500 and NASDAQ Composite. Volatility has started to pick up but there is plenty of room for price weakness to prompt fear and re-positioning on the part of investors. For stocks, the weakest part of the sentiment curve is after optimism peaks and as pessimism becomes more widespread.

Key Takeaway: Risks remain elevated from a sentiment perspective. The bulls continue to hold court as bears are relatively absent despite their rise in recent weeks. Though there are signs that the extended reign in optimism may face a new challenge. Earnings revisions have ceased to rise, taking with it a tailwind that has accompanied the bulls for over a year. Without that tailwind, the possibility of a larger sentiment response to downside pressure on stocks increases. Lower prices have a tendency to beget a pessimistic outlook that in turn begets lower prices. This negative feedback loop could fuel a more complete unwind in sentiment than has been seen to date.

Key Takeaway: Investors continue to favor stocks as money relentlessly pours into equity ETFs. It’s no wonder, given that the main stock indexes are printing new record highs. Yet, a depressed risk appetite and an unsupportive breadth backdrop accompany the persistent push higher in equities. Though these suspect undercurrents aren’t apparent at the index level, we see signs that short-term attitudes are shifting. Bears are on the rise, with the average of the II and AAII bears trending higher. However, pessimism remains relatively mooted and optimism is still elevated when viewed through either a cyclical or strategic lens. The current environment suggests there is more risk than opportunity for equities from a sentiment perspective.

Key takeaway: Sentiment continues to argue a case for caution. Pessimism remains near historical lows. Nasdaq trading volume dwindles along with risk-seeking behavior. And with the economic surprise index slipping below zero, better than expected economic data no longer provides a tailwind. Yet, pockets of strength remain (including the earnings revision trend) and optimism has ticked higher across our sentiment indicators. Active investment managers have increased their exposure, throwing caution to the wind during a seasonally challenging period. All this does not lessen the real risks associated with the lopsided sentiment that tilts toward extended optimism.

Key takeaway: A “no fear” attitude envelopes a market marred by mixed signals and deteriorating breadth. Large-cap indexes push to new highs while small and mid-caps trend lower. We even see an expansion in new lows further down the cap scale. But on the surface, optimism shines. Yet, challenges could lie ahead as a lack of risk-seeking behavior suggests a weariness among investors, and seasonal tendencies lean toward a lackluster performance in the coming months. For now,  equities remain the popular choice among market participants as investor sentiment obscures the fragile reality beneath the surface.

Key takeaway: It’s bears on strike and bulls on parade. While it persists, it can fuel a rally. Whether it can persist is another question. We have already seen (particularly in less robust trading activity and a downward trend in the NAAIM exposure index) evidence of waning risk appetites. Earnings season may test investor resolve. Expectations are in the sky in terms of both results for the past year and estimates for the year ahead. If the earnings rebound is seen as slowing, investors may struggle to maintain an optimistic outlook for stocks, especially with valuations suggesting that they are priced for perfection at current levels.