Blog - Investing Notes

Blog Synthesis: Sentimental Journey

Investors/traders track a range of sentiments (consumer, investor, analyst, forecaster, management), searching for indications of the next swing of the psychological pendulum that paces financial markets. Usually, they view sentiment as a contrarian indicator for market turns (bad means good -- it's darkest before the dawn). Here is a listing of past blog entries related to relationships between human sentiment and the stock market:

Blogger Sentiment Analysis ...analysis of Ticker Sense Blogger Sentiment Poll results indicates that aggregate blogger sentiment is non-predictive for future stock market direction.

Investor Sentiment and Returns for Different Types of Stocks ...low (high) investor sentiment is especially indicative of future outperformance (underperformance) by the most speculative stocks.

Mark Hulbert's Stock Newsletter Sentiment Index ...the Hulbert Stock Newsletter Sentiment Index may have some predictive power for future stock returns. The available sample suggests, that its contrarian signal is most useful for very low values of the index and short-term stock returns.

Extinction of the Predictive Power of Futures? ...aggregate S&P 500 index futures positions by trader category, as reported in weekly Commitments of Traders reports, may in recent years have lost any significant power to predict the behavior of the stock market.

Using Commitments of Traders Reports to Time Asset Allocations ...the information in Commitments of Traders reports regarding aggregate positions of different categories of futures traders may support successful timing of associated markets.

Margin Debt as a Stock Market Indicator ...margin debt tends to lag the stock market by one or two months. Evidence does not support a belief that monthly changes in margin debt reliably predict short-term or intermediate-term stock market behavior.

The UBS/Gallup Measurement of American Investor Optimism ...the UBS/Gallup Investor Optimism Index is modestly reactive to recent stock market behavior, but it has no predictive power for stock returns (even before its release to the public).

A Weighted Guru Groupthink ...the accuracy-weighted intermediate-term group outlook of the gurus we track remains bullish, but less so than for previous measurements. The more accurate half is modestly bullish, and the less accurate half is a little bearish.

Do Investors Fairly Value Stocks of the Most Admired Companies? ...investors may systematically undervalue the stocks of the most admired companies.

The Predictive Power of the Put-Call Ratio for Individual Stocks ...put-call option ratios as defined have significant predictive power for individual stocks, with high (low) ratios indicating short-term underperformance (outperformance). However, this effect relates predominately to data that is not publicly available. Also, the effect does not work for index options.

An Alternative (ISE) Put-Call Ratio Universe ...the ISE put-call ratio may offer a slight edge for intermediate-term trading of the overall stock market, but sample size for the critical back test is very small. Evidence suggests that it is a coincident indicator of stock returns.

Does the CBOE Put-Call Ratio Really Work? ...the CBOE total put-call ratio is not a useful indicator for short-term or intermediate-term trading of the overall stock market. It is more likely a lagging than a leading indicator of stock returns.

Whose Sentiment Matters, and for What Horizon? ...the sentiment of institutional (private) investors probably has some (no) value in predicting stock market returns over a six-month horizon.

Buy Stocks of Companies Experts Hate? ...the stocks of companies least admired by the ostensibly well-informed may well outperform the stocks of the companies most admired.

Aggregate Investor Sentiment and Stock Returns ...aggregate investor sentiment offers some value in forecasting stock returns, especially for the most speculative stocks.

Follow-up on Media Coverage of Economic News ...a reader-initiated follow-up to A Republican Risk Premium?

A Republican Risk Premium? ...a pro-Democrat/anti-Republican bias in the mainstream media may affect the economic risk perception of some investors/potential investors, thereby affecting stock valuations.

Financial News Sentiment Predicts Stock Returns? ...media sentiment predicts small surprises in earnings and stock prices, which investors quickly incorporate into stock prices. However, transaction costs offset the surprise returns.

Can You Learn Anything from Stock Message Boards? ...stock message boards accelerate information dissemination and maybe analysis, but they do not reliably reveal new information (lots of opinions and little or no private information). Message board sentiment does not predict stock returns.

Do Investors Care About "the Way Things Are Going"? ...there is no significant relationship between public sociopolitical satisfaction and investor behavior. Making money on equity investments is independent of "how things are going."

Measuring Company Management Sentiment ...investors/traders generally underreact to the sentiment expressed by management in company annual reports.

Reading Between the Numbers? ...executives of public companies use optimistic and pessimistic language to communicate credible information about expected future firm performance, and the market responds to this information.

Public Sentiment and Stock Returns ...human sentiment is a rear-view mirror measurement, subject to reversal.

"Predicting" the Past with Investor Sentiment ...investor sentiment tends to "predict" the past.

Does Investor Sentiment Give Trading Signals?…just because there is a crowd of traders does not mean there is wisdom.

Does Consumer Confidence Predict Stock Market Returns? ...consumer confidence is not a worthwhile indicator for stock market investors and traders.

In summary, most sentiment measures are snapshots of the recent past, only very weakly indicative of coming reversals. Sentimental journeys generally do not lead to economically significant rewards.

It may be that sentiment measures in general are proxies for recent stock market returns, and any effectiveness they have derives from reversion of unusual short-run returns to the mean.