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Gauging Market sentiment

I am a not a quant but I wondering about how would a quant possibly quantify market sentiment? I mean first of all what would they even look at in terms of variables? Put/call or VIX, margins, institutional interest, etc. How would one possibly model market sentiment? I'm asking this because I personally feel that understanding market behavior is something that needs to be included in one analysis.
 
Volatility getting high suggests people are uncertain. Something like relative short interest (e.g. how many people are betting against a company as opposed to for it), suggests bearish sentiment.
 
Volatility getting high suggests people are uncertain. Something like relative short interest (e.g. how many people are betting against a company as opposed to for it), suggests bearish sentiment.

Yeah I understand those variables but I want something a little more in depth. also something possibly quantifiable. Also that example applies more to company vs company. I am looking for overall market variables
 
Quantifiable? How is relative short vs long interest not quantifiable? Similarly, a volatility measurement is a quantitative measurement. And "company vs company" seems to me to be in direct contrast with "overall market variables"??
 
Quantifiable? How is relative short vs long interest not quantifiable? Similarly, a volatility measurement is a quantitative measurement. And "company vs company" seems to me to be in direct contrast with "overall market variables"??
I might not know exactly what I am looking for but I know this is not it. You bring valid points I suppose but let me ask you this, how would you classify the consumer sentiment which has an effect on the markets? or the GDP numbers or the CPI number. these have more of an affect on the market over-all more so then they do company vs company. This might give you an ideal as to what I am looking for.
 
how would you classify the consumer sentiment which has an effect on the markets?

In a former life, JD Power reports were a source that we used.

There are also various surveys, all data providers (Bloomberg, Factset, Thompson, etc) will give you these metrics along with consensus estimates and hi-lo
 
Also that example applies more to company vs company. I am looking for overall market variables

The CBOE VIX measures the volatility of S&P 500 - not a company vs company. If this isn't an overall measure of market sentiment, nothing is.

CDS swap rates and bond yields can also be used as an indicator of market sentiment.

CDS markets indicate market stress. For instance, look at the CDS swaps of Western European banks or Sovereign nations.

Another is Libor/Euribor (Interbank lending rates)

Another indicator (forward looking) is a Weekly Leading Economic Indicator Index. It has been fairly accurate at measuring economic slowdown/recession far ahead of GDP no's.

I doubt that GDP and CPI numbers have much of an effect.

Firstly GDP and CPI are lagging indicators - they have already been priced in. Don't you remember 2009, GDP number kept getting worse, but the stocks kept rising at a feverish pace. CPI is all about perceptions. I may view a CPI of 4% as good, indicating shortage supplies as a result of shortage in production capacity, as a result of which more industries would be constructed to meet this demand, resulting in more employment. Another may view it as bad, resulting in reduction in purchasing power.

Secondly, their impact is more short term than long term, that is a day or two, probably even an hour. If a stock market wants to crash, even a GDP growth of 5% won't do any good. Stocks would rise initially and then ultimately fall.
 
The CBOE VIX measures the volatility of S&P 500 - not a company vs company. If this isn't an overall measure of market sentiment, nothing is.

CDS swap rates and bond yields can also be used as an indicator of market sentiment.

CDS markets indicate market stress. For instance, look at the CDS swaps of Western European banks or Sovereign nations.

Another is Libor/Euribor (Interbank lending rates)

Another indicator (forward looking) is a Weekly Leading Economic Indicator Index. It has been fairly accurate at measuring economic slowdown/recession far ahead of GDP no's.

I doubt that GDP and CPI numbers have much of an effect.

Firstly GDP and CPI are lagging indicators - they have already been priced in. Don't you remember 2009, GDP number kept getting worse, but the stocks kept rising at a feverish pace. CPI is all about perceptions. I may view a CPI of 4% as good, indicating shortage supplies as a result of shortage in production capacity, as a result of which more industries would be constructed to meet this demand, resulting in more employment. Another may view it as bad, resulting in reduction in purchasing power.

Secondly, their impact is more short term than long term, that is a day or two, probably even an hour. If a stock market wants to crash, even a GDP growth of 5% won't do any good. Stocks would rise initially and then ultimately fall.

Another indicator (forward looking) is a Weekly Leading Economic Indicator Index. It has been fairly accurate at measuring economic slowdown/recession far ahead of GDP no's.
Can you give a link or a name of the weekly indicator?

I doubt that GDP and CPI numbers have much of an effect.
I've seen plenty of time when bad/good econ data comes out and the market react as if they didn't know from the prelims (aka forecasts) what the outcome could be. but I understand your point about being subjective but anything and everything could be subjective. What would you consider a long term indicators? other than VIX, CDS vs bond yields, put/calls, etc? I believe short-term indicators (not technicals like MAs or MACDs) are also important too.

BY THE WAY THANKS TO ALL WHO REPLIED
 
Another indicator (forward looking) is a Weekly Leading Economic Indicator Index. It has been fairly accurate at measuring economic slowdown/recession far ahead of GDP no's.

While there is a weekly index of leading indicators, assembled by the Economic Cycle Research Institute:

http://www.businesscycle.com/reports_indexes/allindexes#index_WLIW_f

http://blogs.wsj.com/marketbeat/201...ster-in-wrong-direction/?mod=google_news_blog

I think that what you are describing here is the better-known "Index of Leading Indicators" from the Conference Board, which is released monthly, not weekly.

http://www.conference-board.org/data/bcicountry.cfm?cid=1

http://www.fcsm.gov/03papers/McGuckin.pdf

http://www.investopedia.com/terms/c/cili.asp#axzz1XYIFyFsG

http://www.nytimes.com/2009/07/25/business/economy/25charts.html

http://www.newyorkfed.org/research/national_economy/nationalindicators.html
http://www.newyorkfed.org/research/directors_charts/ibcd_17.pdf
 
I wanna add one more thing:

The best long term Indicators IMO (I mean over 10-15 years) are government policies. If the govt. screws up everything today (for instance poor regulation, low investment in infra/education, poor immigration policies), then even if the economy were booming now, it isn't far when economy also screws.
 
On a more perceptible form, wouldn't that make the yield rates of government issued bonds the economic indicator?
 
This is one of the most downloaded twentyfive articles in Sciencedirect: http://www.sciencedirect.com/science/article/pii/S0304405X98000270

Abstract

Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
 
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