Insights (White Paper): Sentiment as an indication for market regime switches
Macro Summary White Paper: Using sentiment as a leading asset allocation indicator.
Hello. It’s good to have you here.
I am happy to share this white paper with you. When searching for new market indicators, I usually look at the known research body and then adapt the research question. Market sentiment has been analysed for its market timing abilities. Instead of deciding market directions, it can be far more valuable to just change position sizes.
This time, I wrote the study out as a white paper, which you can download below. I share abstract in this article. As usual, you can find the research code on the GitHub repository.
Repository to the White Paper: Sentiment as an indication for market regime switches:
Abstract:
In this study, Sentiment is evaluated on its ability to indicate a regime switch. It is found, that while declining in effectiveness, investor sentiment, to this date of the study, is a useful measure to evaluate market risk regimes.
The study also finds and tests optimal levels of sentiment spread to effectively switch between regimes. It is interpreted that if the sentiment spread between bullish and bearish investors is high, uncertainty of the market participants is high and the market corrects, usually accompanied with higher volatility. When the spread is low, there is a common theme across investors, resulting in confidence and risk-on regimes, thus beneficial for equities. The conclusion is that investors can use sentiment levels to adjust their risk or asset class allocation in their employed strategies.