Sentiment Indicators

Market mavens look at consumer, investor, analyst and forecaster sentiments. What about the sentiment of the executives of a company of interest? Does what they think about the prospects for their company matter? How can investors determine what they think? In the April 2006 version of his paper entitled “Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports?”, Feng Li examines the relationship between management risk sentiment and future company earnings and stock returns. Managers arguably have more freedom to express themselves in text than with numbers. Using counts of words related to risk or uncertainty in 34,180 Securities and Exchange Commission (SEC) Form 10-Ks filed between calendar years 1994 and 2005 to measure management risk sentiment, he concludes that: Keep Reading

When a company reports earnings or makes presentations to analysts, should investors tune out the verbiage and focus only on the hard financial data? Or, do company executives give soft clues to future firm performance? In their January 2006 working paper entitled “Beyond the Numbers: An Analysis of Optimistic and Pessimistic Language in Earnings Press Releases”, Angela Davis, Jeremy Piger and Lisa Sedor examine the “body language” of the narratives of earnings press releases and test the response of the stock market to this qualitative information. Using textual-analysis software to measure systematically the levels of optimism and pessimism in a sample of 24,000 earnings press releases published on PR Newswire between 1998 and 2003, they find that: Keep Reading

Jeff Walker invites visitors to the “Current Investor Sentiment” page at Lowrisk.com to express their market sentiment by predicting the direction of the Dow Jones Industrial Average (DJIA) over the next few weeks. He also generously offers weekly historical results of this ongoing poll back to May 1997. How well does this measure of investor sentiment predict the actual behavior of the DJIA? Keep Reading

In The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, James Surowiecki identifies and discusses the three conditions necessary for a crowd to make good group decisions. Applied to the stock market, good decisions means stock prices that reflect the true values of underlying assets. As depicted in the figure below, the three conditions are: Keep Reading

Should traders lean with or against the crowd? In their May 2002 paper entitled “Investor Sentiment and the Near-term Stock Market”, Gregory Brown and Michael Cliff from investigate whether investor sentiment offers any valid trading signals. They find that: Keep Reading

Should we pay attention whenever pollsters issue new consumer confidence numbers? In their October 2002 paper entitled “Consumer Confidence and Stock Returns”, Ken Fisher and Meir Statman examine whether consumer confidence, as defined and measured by the Conference Board and the University of Michigan, predict the stock market? They determine that: Keep Reading