Measuring Market Sentiment

Successful investors and traders alike usually have a rule-based strategy that provides them a financial advantage or edge. A combination of OTA’s core strategy (institutional supply and demand),  fundamental and technical analysis are typical components. Another analysis we can add to the recipe is investor mood, commonly called sentiment. In other words, do market participants feel bullish, bearish or neutral about the future?

Traders should keep an eye on the world markets.

While each region and country has a unique economy, given the volume of international trade, those individual economies are part of a larger global economy. The U.S. economy is the largest in the world but, more importantly for this analysis, it is also the last market traded on the daily clock. This allows U.S. investors a glimpse at how the Asian and European markets are trading before the U.S. stock market opens.

 

By the time the U.S. market opens, Asian markets are closed and European markets are heading into their afternoon session. Watching the results of these markets can frequently give us a clue as to how the U.S. market will trade. Is the world Bullish? Bearish? Neutral? There is empirical evidence that world investor sentiment can influence the U.S market. And being the world’s largest economy, the U.S market in turn has influence on the open of those world markets the next trading day.

Each region tends to influence the next region trading on the world clock. Catalysts (economic data, for example) within each region help determine the local sentiment. These catalysts can change or reinforce the direction of investor sentiment. Imagine sentiment as a relay race with catalysts being the baton that is passed.

Strategy for Assessing World Sentiment

Many years ago, I developed a simple filter for world sentiment, which I call the World Index. The foundation of off the World Index is the daily cash market percentage change of the major Asian and European indices along with the U.S. futures percentage change of the S&P 500 index leading into the U.S market open.

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