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Sentiment Indicators

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). These blog entries relate to relationships between human sentiment and the stock market.

Consumer Inflation Expectations Predictive?

A subscriber noted and asked: “Michigan (at one point) claimed that the inflation expectations part of their survey of consumers was predictive. That was from a paper long ago. I wonder if it is still true.” To investigate, we relate “Expected Changes in Prices During the Next Year” (expected annual inflation) from the monthly final University of Michigan Survey of Consumers and actual U.S. inflation data based on the monthly non-seasonally adjusted consumer price index (U.S. city average, All items). The University of Michigan releases final survey data near the end of the measured month. We consider two relationships:

  • Expected annual inflation versus one-year hence actual annual inflation.
  • Monthly change in expected annual inflation versus monthly change in actual annual inflation.

As a separate (investor-oriented) test, we relate monthly change in expected annual inflation to next-month total returns for SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT). Using monthly survey/inflation data since January 1978 (limited by survey data) and monthly SPY and TLT total returns since July 2002 (limited by TLT), all through October 2021, we find that: Keep Reading

AAII Investor Sentiment as a Stock Market Indicator

Is conventional wisdom that aggregate retail investor sentiment is a contrary indicator of future stock market return correct? To investigate, we examine the sentiment expressed by members of the American Association of Individual Investors (AAII) via a weekly survey of members. This survey asks AAII members each week (Thursday through Wednesday): “Do you feel the direction of the market over the next six months will be up (bullish), no change (neutral) or down (bearish)?” Only one vote per member is accepted in each weekly voting period.” Survey results are available the market day after the polling period. We define aggregate (net) investor sentiment as percent bullish minus percent bearish. Using outputs of the weekly AAII surveys and prior-day closes of the S&P 500 Index from July 1987 through early October 2021 (1,783 surveys), we find that: Keep Reading

In Search of the Bear?

Is intensity of public interest in a “bear market” useful for predicting stock market return? To investigate, we download monthly U.S. Google Trends search intensity data for “bear market” and relate this series to monthly S&P 500 Index returns. For comparison with the “investor fear gauge,” we also relate search data to monthly CBOE option-implied S&P 500 Index volatility (VIX) levels. Google Trends analyzes a percentage of Google web searches to estimate the number of searches done over a certain period. “Each data point is divided by the total searches of the geography and time range it represents to compare relative popularity… The resulting numbers are then scaled on a range of 0 to 100 based on a topic’s proportion to all searches on all topics.” Using the specified data as of 9/14/2021 for the period January 2004 (earliest available on Google Trends) through August 2021, we find that: Keep Reading

Aggregate Account Debt/Credit as Stock Market Indicators

“Margin Debt as a Stock Market Indicator” investigates whether NYSE margin debt predicts future stock market returns. Since updates to this variable are not available, we instead consider the following three aggregate monthly investment account metrics from the Financial Industry Regulatory Authority (FINRA) as alternative margin-related indicators of investor sentiment:

  1. Margin account debt (aggressive use of borrowed funds).
  2. Cash account credit (dry powder with perhaps conservative intent).
  3. Margin account credit (dry powder with perhaps aggressive intent).

FINRA generally updates these metrics during the third week of the month after the measured month. We relate each metric to future SPDR S&P 500 Trust (SPY) returns as a proxy for U.S. stock market returns. Using end-of-month values of the aggregate account metrics and monthly dividend-adjusted SPY prices during January 1997 (except February 2010 for margin account credit) through August 2021, we find that: Keep Reading

Should Investors Care About “the Way Things Are Going”?

Are broad measures of public sociopolitical sentiment relevant to investors? Do they predict stock returns as indicators of exuberance and fear? To investigate, we relate S&P 500 Index return and 12-month trailing S&P 500 price-operating earnings ratio (P/E) to the percentage of respondents saying “yes” to the recurring Gallup polling question: “In general, are you satisfied or dissatisfied with the way things are going in the United States at this time?” Since individual polls span several days, we use S&P 500 Index levels for about the middle of the polling interval. To calculate market P/E, we use current S&P 500 Index level and most recent quarterly aggregate operating earnings. Using Gallup polling resultsS&P 500 Index levels and 12-month trailing S&P 500 operating earnings as available during July 1990 (when polling frequency becomes about monthly) through mid-August 2021, we find that: Keep Reading

Investor Sentiment as Measured by Social vs. Traditional Media

Does the sentiment of social media uniquely predict stock market movements, or does it simply mirror the overall sentiment of traditional media? In their May 2021 paper entitled “Investor Sentiment, Media and Stock Returns: The Advancement of Social Media”, Ioanna Lachana and David Schröder compare abilities of daily social and traditional media sentiments to predict daily U.S. stock market returns. They construct positive, negative and pessimism indexes for each of three sources over 2006 through 2020 from:

  1. Traditional: 3,776 daily “Markets” columns from the Wall Street Journal (WSJ).
  2. Social: 85,116 articles from Seeking Alpha (SA), identified as either “independent” (trade only for themselves) or “corporate” (trade on behalf of others).
  3. SA comments: 1.6 million comments that respond to SA articles.

They each day count negative, positive and total numbers of words and combine counts to calculate negative, positive and pessimism index values. Using the specified daily articles/comments and daily S&P 500 Index level during January 2006 through December 2020, they find that: Keep Reading

Gold Price Drivers?

What drives the price of gold: inflation, interest rates, stock market behavior, public sentiment? To investigate, we relate monthly and annual spot gold return to changes in:

We start testing in 1975 because: “On March 17, 1968, …the price of gold on the private market was allowed to fluctuate…[, and] in 1975…the price of gold was left to find its free-market level.” We lag CPI measurements by one month to ensure they are known to the market when calculating gold return. Using monthly data from December 1974 (March 1978 for consumer sentiment) through May 2021, we find that: Keep Reading

Analyst Long-term Earnings Growth Forecasts and Stock Returns

Should investors buy stocks of companies for which analysts have issued very high earnings growth forecasts? In the March 2021 revision of their paper entitled “Diagnostic Expectations and Stock Returns”, flagged by a subscriber, Pedro Bordalo, Nicola Gennaioli, Rafael La Porta and Andrei Shleifer update and extend prior research on the relationship between analyst long-term earnings growth forecasts and future returns of associated stocks. They define long-term forecasts as expected annual increase in operating earnings over the next three to five years. To relate these forecasts to stock returns, they each December form ten equal-weighted portfolios by ranking stocks into tenths (deciles) based on annual geometric average forecasted long-term earnings growth. They hold these portfolios until the next December, rebalancing each back to equal weight monthly. They focus on the highest long-term growth (HLTG) and lowest long-term growth (LLTG) decile portfolios. Using analyst earnings growth forecasts since December 1981 for a broad sample of U.S. common stocks and associated stock returns since December 1978, all through December 2016, they find that:

Keep Reading

Measuring Crypto-asset Price and Policy Uncertainty

How uncertain are investors about cryptocurrencies, and what drives their collective uncertainty? In their March 2021 paper entitled “The Cryptocurrency Uncertainty Index”, Brian Lucey, Samuel Vigne, Larisa Yarovaya and Yizhi Wang present a Cryptocurrency Uncertainty Index (UCRY) based on news coverage, with two components defined as follows:

  1. UCRY Policy -weekly rate of cryptocurrency policy uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.
  2. UCRY Price – weekly rate of cryptocurrency price uncertainty news minus average weekly observed rate, divided by standard deviation of weekly observed rate, plus 100.

They distinguish between these two types of cryptocurrency uncertainty to understand differences in behaviors between informed (policy-sensitive) and amateur (price-sensitive) investors. Using 726.9 million relevant date/time-stamped news stories during December 2013 through February 2021, they find that: Keep Reading

Consumer Sentiment and Stock Market Returns

Business media and expert commentators sometimes cite the monthly University of Michigan Consumer Sentiment Index as an indicator of U.S. economic and stock market health, generally interpreting a jump (drop) in sentiment as good (bad) for future consumption and stocks. The release schedule for this indicator is mid-month for a preliminary reading on the current month and end-of-month for a final reading. Is this indicator predictive of U.S. stock market behavior in subsequent months? Using monthly final Consumer Sentiment Index data and monthly levels of the S&P 500 Index during January 1978 through February 2021, we find that: Keep Reading

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