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A big part of sentimenTrader is four sentiment models that have taken years diligent research to form. They are by no means a timing panacea, but they each serve a useful purpose when put into the proper perspective. We want to provide users with the information they need to be aware of the current state of market sentiment, in all time frames. Like fundamental and technical analysis, sentiment can be quantified, measured and tested. That's what we have done to come up with our models. STEM.MR MODEL Time Frame: Very short-term Updated: Intraday The STEM.MR model has the shortest term. It was developed because several of the shorter-term sentiment indicators we follow have displayed a mean-reverting tendency in the past - when they go too far in one direction, they tend to snap back to an average value. Often when they snap back, it correlates with short-term market turning points. We use 30-minute data to calculate the index, which allows us to capture intraday extremes which so often occur while for the most part avoiding early-morning inaccuracies. Depending on market conditions, a signal could last anywhere from an hour to several days. Typically, however, the market makes a decision one way or the other and it is usually clear fairly soon whether the signal will be effective or not. Following is an example from a recent period:
Extreme readings are anything which exceed the upper or lower trading band. When the model goes above its upper (red) band, then optimism has become extreme and the broader market is likely to stall or head lower. Conversely, a model reading below the lower (green) band means pessimism is rampant, the market is oversold, and we're likely to head higher. These extremes typically happen three to four times per month. NEW! This model is now updated every 1/2 hour every trading day for subscribers
STEM MODEL Time Frame: Short-term Updated: Daily The Short-Term Extreme Model (STEM) is a model consisting of several sentiment measures including: * TICK * TRIN * Put/Call ratios * VIX * Proprietary sentiment measures We use 30-minute data to calculate the index, but it covers a longer time period than our shortest-term model, the STEM.MR. Following is a chart of a recent time period:
An extreme model reading can be considered anything outside of the model's trading bands. A reading outside the upper band would suggest that the market is overbought and a reading under the lower band would suggest that it is oversold.
While the index certainly reaches more extreme levels, these general areas should serve as a “warning sign” that a change in direction may be forthcoming.
COMPOSITE MODEL Time Frame: Intermediate-term Updated: Daily This is what we believe to be the most comprehensive model of current sentiment conditions currently published - but this does not mean that it necessarily uses the most indicators! In our research, we have found that many popular sentiment indicators have predictive ability little better than random, which is not acceptable to us. We want proof that an indicator is useful before using it in a model. Through exhaustive research, we have determined the sentiment indicators (both published and proprietary) that are most correlated with future market direction, and we weight those indicators according to their correlation. We have tried to use a combination of measures that would give a broad picture of current conditions, but yet be responsive enough to reflect daily conditions while using measures that were not correlated to each other for the most part. Following is a chart of a recent time period:
When investor pessimism reaches such a great degree that it pushes the model outside of its lower (green) trading band, then we can surmise that it has reached almost reached a panic stage and a market rebound is likely to follow. Conversely, model readings that push above the upper (red) trading band are a sign that complacency or optimism is rampant, and even in strong uptrends, equities have a difficult time sustaining additional upside. We present subscribers with three averages of the model (5-day, 10-day and 21-day) to help accommodate different time frames.
AIM MODEL Time Frame: Intermediate to Long-term Updated: Weekly The Advisor & Investor Model (AIM) is a
model which averages the momentum of the four major sentiment surveys. Following is a chart of a recent time period:
When optimism reaches a degree extreme enough to move the model above its upper trading band, then we know that investor and advisor sentiment is reaching a frothy stage that is very rarely rewarded with rising market prices - usually, the market stages a decline soon afterwards (red arrows highlight those times on the chart below). In contrast, when the survey populations are so pessimistic that it forces the model below its lower trading band, then we know that we have likely entered a panic selling stage that will result in a market rebound with a high degree of accuracy (the green arrows on the chart). Home | Comments | Models | Indicators | Money Management | About Us | Subscribe
© 2001-2008 Sundial Capital Research, Inc. All rights reserved. sentimenTrader.com is a trademark of Sundial Capital Research, Inc. Sundial Capital Research, Inc. 12527 Central Avenue NE, Suite 165 Blaine, MN 55434 |
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