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This is what we believe to be the most comprehensive model of current sentiment conditions currently published. 

That does not mean that it necessarily uses the most indicators - in our research, we have found that many popular sentiment indicators have predictive ability a 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 market direction, and we weight those indicators according to their correlation.  Some of the measures used in the model include:

  • Sentiment surveys

  • Proprietary versions of the Commitments of Traders data

  • Put/call and open interest put/call ratios

  • Volatility indices

  • Breadth ratios

  • TRIN

  • Several un-published indicators

This is not an exhaustive list, but you get the idea.  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.

The chart shows the 5-, 10- and 21-day moving averages of the model in blue, with the green and red lines depicting +2 and -2 standard deviations from the 12-month mean, respectively.  This means that the model should stay within these boundaries 95% of the time, and when it doesn't, that tells us something notable.

When the model ventures outside of its lower (green) trading band, then it suggest that pessimism is excessive and we want to look for rising market prices going forward.

When it exceeds its upper (red) band, then sentiment has gotten too optimistic and the broader market typically has trouble holding further gains going forward.

 

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