Sentiment Leading the Market – Again!

I've been getting lots of requests to update the market sentiment index I showed in a previous posting. While those that subscribe to RavenPack data have been able to calculate the index themselves, here's an updated graph with news analytics data up to August 17th 2011.

As you can see from the figure below, the sentiment index began trending downwards already in July of 2010, indicating a worsening market environment. The decline ended in February 2011 after which sentiment stabilized and began trending upwards. Historically, news sentiment (as a proxy for market sentiment) has been a powerful leading indicator of future underperformance. This particular sentiment index appears to signal turning points in the market with a lead time of up to 12 months. Recently, a similar picture suggests an increased risk of a market correction in 2011.

According to the sentiment index, we may expect a stock market recovery by the end of the year or early next year. Also, according to information available on companies in the media, another crisis similar to that of 2008 is unsupported.