Shares RouteMap: Investment Sentiment

Buy on the up arrows, sell on the down arrows

Sample of our composite indicator of investment sentiment. The red up + down arrows show our track record. The thin white and yellow lines explain it.

This is a contrarian strategy, based on our library of some 500 indicators around the world. These analyse which types of investor are successful, and which types are not, in order to see what predictive value that may have a year into the future. These individual indicators are combined into a composite indicator for each market designed to predict market levels a year later.  That is to say at any point in the past, the index shows at what level the market actually stood, while the indicator shows where it was expected to be a year earlier.
The stock market index is shown as the thick white line on the right hand axis. The explanatory variable, the composite Sentiment Indicator, shown as the thin yellow line, uses the left hand axis. The Sentiment Indicator is advanced 12 months to show our Best Guess of what is most likely to happen a year ahead, assuming the respective types of investor are as successful, or unsuccessful as they were over the previous decade. Thus the indicator level at the same date as the market index shows what the indicator had predicted a year ago. Both series are rebased so that December 1994 = 100.
Buy & sell signals, that rely solely on data already published, are represented by red arrows embedded in the price index. These Buy & Sell signals indicate changes in the forecast direction of share prices a year into the future.
A large range of different indicators of investment sentiment have been tested to see which have meaningful predictive power looking a year ahead. Depending on what is available in different countries, these may include surveys of institutional or retail investors, mutual fund sales, discounts to net asset value for closed-ended funds or regulatory reports about trading activity by different classes of investors in stock or futures markets. Smaller countries may also be heavily influenced by large powerful neighbours.
No single indicator can be relied upon with a high degree of certainly, for otherwise excessive popularity would lead to lower returns. However our research shows that an exponential improvement in the odds of success can be generated by combining multiple indicators that reflect the behaviour of different investors. Up to 32 individual indicators may be used for each composite indicator.
This strategy was highly effective in practice until the 2008 financial crisis, when many normally-successful types of investor because forced sellers. However it is necessary to review the composition of these composite indicators every few years as investors who used to get it right may now increasingly get it wrong and vice versa.