Market sentiment today; comparison to Lehman
Over the last couple of days, we’ve compared the current SentiTrade’s values to those of the Lehman crisis in 2008. At the time of the Lehman collapse, our sentiment quotient (the ratio between positive and negative news items) had a value of 0,51 with a yearly average of 0,54.
Applying a trend following strategy to the Lehman scenario, i.e. a situation where negative market sentiment drives a bear market, we analyzed the quotient numbers to find when the market sentiment trend turned. Two scenarios could be used to identify when the negative trend was reversed:
1. When SentiTrade’s 20 day moving average had crossed the yearly average value
2. When SentiTrade’s 20 day moving average had recovered more than 15% from its low
Following the Lehman collapse, applying the first scenario we generated a long signal on May 26th, 2009 (DAX at 4,891). Using the second scenario, a new long signal was dispatched already on on Feb. 26, 2009 (DAX at 3,889).
Bearing the above scenarios in mind for the current debt crisis, we’re still far away from a change in trend. Currently, the 20 day moving average is at 0,57, compared to a yearly average of 0,61. It is of course impossible to predict exactly when then the market sentiment trend will turn, however, we would avoid long positions before one of the two scenarios conditions materialize.