Sentiment volatility; Risk on?
By increased sentiment volatility, i.e. when news events swing from hope to doom and vice versa, does a “risk on” situation emerge? One may of course calculate volatility on practically any instrument. Generally, high volatility is express nervousness and is frequently associated with sharply falling prices.
We recently reviewed the correlation between the volatility of our Sentiment Quotient numbers (the ratio between positive and negative news items), and DAX fluctuation dating back to 2005. The chart below shows that a sharply falling market, triggers high sentiment volatility, i.e. between Sept. 2008 and March 2009.
Looking at the current situation we note the following: Volatility in sentiment, prior to the European debt crisis, was just shy of 70% in May and increased to 97% by Aug. 11. Interestingly, a sharp increase in sentiment volatility was recorded already in June of 2011. By Sept. 12, the sentiment volatility had retracted to 73% but has now quickly advanced to 84%.
What does this all mean? We take a further increase in sentiment volatility to express nervousness and associate this to a falling market.
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