Stretched sentiment and positioning are downside risks to 2H – HSBC

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Market sentiment indicators are now flashing a “sell” signal, suggesting potential downside risk in the latter half of the year, according to Max Kettner, chief multi-asset strategist at HSBC Global Research.

The post-Liberation-Day rally has failed to generate much enthusiasm among investors, despite the broad-based rally in risk assets that has occurred, he said.

“Our aggregate shorter-term sentiment and positioning indicator is now sending quite a strong ‘sell’ signal, and even more so when we only use our daily indicators,” Kettner said.

While the “buy” indicator has retreated recently, the “sell” indicator is currently flashing a mild signal of 25%, with particular significance expected only after crossing the 50% threshold.

Long-only investors appear to have reduced their exposure to equities (SP500 [https://seekingalpha.com/symbol/SP500]), (COMP:IND [https://seekingalpha.com/symbol/COMP:IND]), (DJI [https://seekingalpha.com/symbol/DJI]) and high-yield credit (PHB [https://seekingalpha.com/symbol/PHB]) around Liberation Day, Kettner said, and added that CTAs have decreased their equity and rates exposure over the past week compared to two weeks ago, while slightly increasing their exposure to the U.S. dollar (DXY [https://seekingalpha.com/symbol/DXY]).

“Our equity momentum indicator is at max long,” he said, noting that both U.S. equity funds (SP500 [https://seekingalpha.com/symbol/SP500]), (COMP:IND [https://seekingalpha.com/symbol/COMP:IND]), (DJI [https://seekingalpha.com/symbol/DJI]) and U.S. multi-asset funds have increased exposure toward equities, with both inputs currently flashing “sell” signals.

Additionally, in foreign exchange markets, both G10 ‘risk-on’ and EM FX positioning has retreated from stretched net long levels versus the U.S. dollar.

Despite these warning signs, Kettner doesn’t believe it’s time to abandon risk assets completely.

“The wall of worries around the August tariff deadlines and concerns around a negative impact on margins and earnings in the Q2 reporting season should see us squeeze higher still in the coming weeks,” he said, while cautioning that factors such as “sudden renewed tariffs on semiconductors (SMH [https://seekingalpha.com/symbol/SMH]), (SOXX [https://seekingalpha.com/symbol/SOXX]) coupled with more stretched sentiment and positioning have the potential for at least a short-term setback over the summer months.”

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