Three of the main information sources for gauging the sentiment of investor are the surveys of sentiment, insider trading and calculated indicators. They are discussed below.
The reason why education about business and investor sentiment is important is because prices rise and fall based partly on sentiment. If sentiment is optimistic even bad news may not stop prices rising, whereas when it is pessimistic even good news will not stop prices falling.
At extremes sentiment becomes a contrary indicator. When everyone is very optimistic it is considered that everyone has bought and there is no one left to buy. Then we can expect sellers to take their profits and buyers to change their minds. In other words, when the sentiment is extremely bullish the market is likely to be near a top. Clearly you need to monitor the sentiment about businesses, markets, sectors and individual stocks closely in order to invest well.
Surveys of Sentiment
The most popular surveys include those of the American Association of Individual Investors, The Conference Board, Consensus, Investors Intelligence, Market Vane, the University of Michigan and Yale University. There are many other lesser known surveys of sentiment.
The web sites of the originators of these surveys are the best place to find information about them though not always the best place to see the survey results. The results of the more popular surveys are always reported in the news. Subscribers and Members should look at FIFTI™ Search under Sentiment to find reports of the sentiment surveys online.
Insider Trading
One way to gauge investor sentiment is to watch insider trading. It is reckoned that the insiders, the executive in a business, must know better than anyone else how the business is doing and whether the performance of the company is going to improve or drop. The insider trading we refer to is the legal insider trading by directors and senior employees of a company.
It is generally thought that insider buying is a more reliable indicator that insider selling. The reason is that insiders may sell for a variety of reasons including personal reasons that have nothing to do with the future performance of the stock price. However insider buying is for only one reason and that is that the insiders expect the price of the stock to increase.
Calculated Indicators of Investors' Sentiment
Perhaps the most accurate indicators of investors’ attitudes are those that are calculated based on what investors are actually doing with their money. The calculated indicators often used to measure investor attitudes include volume, market breadth, momentum, relative strength, put/call ratio, open interest, short interest and implied volatility.
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http://www.aaii.com/ The American Association of Individual Investors’ survey is based on the views of members.
http://www.amex.com/ The American Stock Exchange calculates another indicator of sentiment for the implied volatility of the Nasdaq 100 by calculating the QQV from the prices of QQQ options. QQQ is the Nasdaq-100 Index Tracking Stock, which is an Exchange Traded Fund (ETF) and has a value that is 1/40 of the Nasdaq 100.
http://www.cboe.com/ The Volatility Index, VIX, is calculated by the Chicago Board Options Exchange. Since September 2003, the VIX has been calculated based on prices of S&P 500 options. Prior to September 2003 the VIX was based on the prices of the S&P100 Index Options. The calculation based on the S&P100 Index Options now has the ticker VXO. The VXN measures the implied volatility for the Nasdaq 100, and its formula also changed in September 2003. It is calculated by the Chicago Board Options Exchange using the same methodology as for the VIX.
http://ccea.uconn.edu/webster-uconn.htm has the University of Connecticut’s Webster Consumer Confidence Index Survey.
http://www.chartfilter.com/ has an extensive list of technical indicators that it explains.
http://www.consensus-inc.com/ The Consensus Bullish Sentiment Index is based on the positions and attitudes of major professional brokerage firms and advisors.
http://www.conference-board.org/ The Conference Board, conducts surveys of consumer confidence. The Conference Board’s Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.
http://www.daytrading.about.com/ provides education about the calculated indicators.
http://www.decisionpoint.com/ Carl Swenlin writing in the newsletter of http://www.stockcharts.com/ and a December 2004 newsletter from http://www.leavittbrothers.com/ cast doubt on the usefulness of the NYSE breadth (advance-decline) data.
http://www.erlanger2000.com/ Phil Erlanger has a paper on using short interest and relative strength to determine whether to buy, hold, sell or sell short a stock.
http://futures.tradingcharts.com/ describes the usefulness of knowing the relationship of price, volume and open interest.
http://icf.som.yale.edu/ The Yale survey is based on questionnaires to determine investors’ attitudes.
http://www.investopedia.com/ has an extensive explanation of the VIX, and of market breadth, in the articles that are linked from its glossary.
http://www.investorsintelligence.com/ The Investors Intelligence survey is based on financial advisors’ sentiments.
http://www.investorwords.com/ the glossary explains Open Interest and other indicators.
http://www.ivolatility.com/ has education in option related indicators, such as put/call ratio, VIX and others. It has an article under Education in its Knowledge Base which is an introduction to volatility. It links to an article in Active Trader Magazine of April 2001 called Putting Volatility To Work which, amongst other things, explores trading the difference between historical and implied volatility. Further information about implied volatility can be obtained from the glossaries.
http://www.lowrisk.com/ collects guesses for the closing value of the Dow Jones Industrial Average next Friday and publishes the median guess with the percentage of bullish, bearish and neutral estimates.
http://www.marketscreen.com/ explains that an open contract can be a long or short contract.
http://www.marketsummaryandforecast.com/ is where Larry Katz explains market breadth.
http://www.marketvane.net/ The Market Vane Bullish Consensus measures the futures market sentiment each day by following the trading recommendations of leading Commodity Trading Advisors.
http://www.mrswing.com/ explains how volume and other indicators reflect investors' attitudes.
http://www.nasdaqtrader.com/ and http://www.nasdaq.com/ provide a detailed explanation of short interest.
http://www.night-trading.com/ explains why you need to know about open interest.
http://www.optionetics.com/ has an Education section that includes explanations of calls, puts, volatility and other options indicators.
http://www.poserglobal.com/ explains thThe use of Open Interest and the use of the Directional Movement Index for measuring whether the market, or a particular stock, is in a trend.
http://www.refco.com/ is where Larry Williams explains open interest.
http://www.russell.com/ The Russell Investment Group conducts a quarterly survey of investment managers.
http://www.sca.isr.umich.edu/ The University of Michigan’s survey is the best known of the university surveys. Its survey of consumers is based on more than 500 telephone interviews.
http://www.schaefferresearch.com/ uses open interest frequently in deciding on its advice.
http://www2.sjsu.edu has the survey of San Jose State University in California.
http://www.spectrem.com/ carries out telephone surveys of affluent households to gather the data for its Affluent Investor Index – households with $500,000 or more in investable assets, and its Millionaire Index.
http://www.stock-market-sentiment.com/ collects traders opinions and sentiment and publishes the results for the Dow Industrial and Nasdaq indexes.
http://www.thomson.com/financial/fi_investmgr.jsp or http://www1.firstcall.com Mark LoPresti explains that a University of Michigan study by George Seyhoun shows that insider trading combined with price-to-book ratios is a more reliable predictor of future out-performance that price to book value alone. This is especially true if the insiders buying are high ranking officers of the company. The reverse, that is selling a high price to book value stock when insiders are selling, is not as reliable an indicator of under-performance.
http://www.tradingarticles.com/ There is one article in which David Haddock argues that insider trading can hurt the professional but rarely hurts the individual investor.
http://www.whispernumber.com/ Market sentiment is available and sentiment for individual stocks is displayed. The sentiments expressed are based on the views of individual investors.
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