Earlier this fall, Dr. Brett Steenbarger of TraderFeed published an excellent series of articles outlining three market sentiment indicators based on inter-market ratios. The articles presenting the rational follow:
Gold as a Sentiment Measure for Technology
Using Sector Relationships to Catch Trader Sentiment
Global Performance as a Gauge of Trader Psychology
Intrigued and inspired by the good doctor, I developed a simple unified sentiment oscillator and trading system incorporating the core concepts from these three posts, plus an additional ratio relating the Dow Transports to the S&P500. The oscillator is calculated by adding the log ratios of EEM:SPY, XLK:^XAU, XLY:XLP, and IYT:SPY. A ten-day ratio of the result converts the calculation to an oscillator.
You will find that the oscillator moves fairly consistently between 0.99 and 1.01, which indicate short-term market despair and euphoria, respectively. Today's ugly market pushed this indicator down to .994. In my next post I will suggest a hypothetical trading system that employs this oscillator.
Sunday Night Futures
1 hour ago