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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.

Reading Between the Numbers

When a company reports earnings or makes presentations to analysts, should investors tune out the verbiage and focus only on the hard financial data? Or, do company executives give soft clues to future firm performance? In their January 2006 working paper entitled “Beyond the Numbers: An Analysis of Optimistic and Pessimistic Language in Earnings Press Releases”, Angela Davis, Jeremy Piger and Lisa Sedor examine the “body language” of the narratives of earnings press releases and test the response of the stock market to this qualitative information. Using textual-analysis software to measure systematically the levels of optimism and pessimism in a sample of 24,000 earnings press releases published on PR Newswire between 1998 and 2003, they find that: Keep Reading

Predicting the Past with Investor Sentiment

Jeff Walker invites visitors to the “Current Investor Sentiment” page at Lowrisk.com to express their market sentiment by predicting the direction of the Dow Jones Industrial Average (DJIA) over the next few weeks. He also generously offers weekly historical results of this ongoing poll back to May 1997. How well does this measure of investor sentiment predict the actual behavior of the DJIA? Keep Reading

Detecting Wisdom in a Crowded Market

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: Keep Reading

Does Investor Sentiment Give Trading Signals?

Should traders lean with or against the crowd? In their May 2002 paper entitled “Investor Sentiment and the Near-term Stock Market”, Gregory Brown and Michael Cliff from investigate whether investor sentiment offers any valid trading signals. They find that: Keep Reading

Does Consumer Confidence Predict Stock Market Returns?

Should we pay attention whenever pollsters issue new consumer confidence numbers? In their October 2002 paper entitled “Consumer Confidence and Stock Returns”, Ken Fisher and Meir Statman examine whether consumer confidence, as defined and measured by the Conference Board and the University of Michigan, predict the stock market? They determine that: Keep Reading

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