Macro trading

Sentiment indicator analysis sometimes referred to as contrary opinion analysis is essentially the study of investor's attitudes toward the market. While sentiment analysis has many uses it is most often used to find turning points in the market and not the primary trend.

Just as there are short term and long term trend indicators there are also short and longer term sentiment indicators. Some of the better known indicators include the put/call ratio, the SP500 volatility index or VIX, and the Investors Intelligence polling data. While there are several more indicators that you can use these are some of the more popular ones.

If you are looking at the put/call ratio you are looking at the total put volume divided by the total call volume. The higher the number the closer we are to the bottom and the lower we are the closer we are to the top. When it is in between there is usually little if any significance.

The volatility index also known as the VIX tracks the implied volatility of the SP500. What this means is that the VIX is the markets forecast of the potential move expressed as a percentage. This is an annualized number so if it says thirty then it means the market should move thirty percent over the next year.

The standard way of using the VIX is the higher the VIX is the better the chance that we have hit a bottom, and the lower the reading the more complacent the market is and therefore we have a better chance at being at a top. Again using other indicators such as moving averages and Bollinger Bands can help when deciphering the VIX.

Another widely used sentiment indicator are the different investor polls. The longest running poll is the Investors Intelligence polls which have been continuously put out since the sixties.

Essentially sentiment indicators are useful to gauge the wrong way crowd. At extremes sentiment data can help you to find potential turning points in the market. And more importantly they can help you find hidden risks.

At this point we hope that you recognize the importance and usefulness of sentiment analysis. You can use this data across markets and it will help you make and preserve money.