MW Hopes that tariff fear has peaked sees this sentiment gauge flip to risk-on

By Jamie Chisholm

The stock market's sharp rally after its April swoon has flipped one measure of animal spirits on its head.

A risk-on/risk-off gauge tracking investor sentiment, created by analytics group Duality Research, showed risk aversion predominated during much of last month, but in May the mood has switched to being more gung ho.

In correspondence with MarketWatch, Duality explained that its gauge is based on a number of input variables, with the largest examining the relative strength of defensive stocks.

"Ultimately, we're aiming to gain a more comprehensive perspective on defensive names and how they're performing relative to the broader market," said Duality.

When relative demand for defensive stocks falls it's often the case that investors are showing a desire to make more daring bets.

Referring to the chart below, Duality said the strong price action for the S&P 500 SPX in the past week or so "flipped our risk-on/risk-off indicator back to green after over a month in the red."

The switch was "another data point going in the bulls bucket in our weight-of-the-evidence approach. After all, such trend improvements can often lay the groundwork for a sustained rally," they said.

In a Substack post at the start of the week, Duality noted that the sharpness of the stock market rebound was probably based on investors' belief that peak tariff angst was reached by mid-April, and despite fears of a slowing economy.

"The rate of change is what really moves markets - so even if things aren't great right now, improvement alone can keep the momentum going...as long as the administration keeps rolling back tariffs, then honestly, the macro noise probably doesn't matter all that much," the firm said.

The stock market's strength was underscored a week ago when the S&P 500 SPX erased an intraday decline of 2.3% - a rare and powerful bullish signal, according to Duality.

"In fact, the last time it pulled off a move like that was back on October 13, 2022 - yep, the day the market bottomed during the 2022 bear market," they said.

However, Duality also sounded some notes of caution. Staples stocks, which are deemed defensive, remain in a relative uptrend against the S&P 500. "That's not what we'd expect after such a strong [upward] reversal," they said.

And they observe that investment-grade spreads - the extra interest rate above Treasury yields charged to safer companies for borrowing - have stopped narrowing and are stuck above 100 basis points, despite stocks grinding higher.

"We usually say nothing really bad happens when IG spreads are below 100, so it'd be nice to see that happen soon," said Duality.

-Jamie Chisholm

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May 07, 2025 08:39 ET (12:39 GMT)

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