Belgium triggers an optimism index short signal

Dean Christians

2022-04-13

Key points:

The optimism index for the Belgium ETF (EWK) reversed lower relative to its recent range
The long-term trend for the ETF shows a declining 200-day moving average
Belgium has fallen 75% of the time over the next month after other signals

Using the optimism index to identify bearish sentiment reversals in downtrends

A trading model that uses the Optix Index to identify when sentiment reverses from a period of optimism issued a short signal for the Belgium ETF (EWK) at the close of trading on 4/12/22.

Sentiment signals work best when they reverse from an extreme

The model applies a 42-day range rank to the 8-day moving average of the Optimism Index for the Belgium ETF (EWK). As a reminder, the range rank indicator measures the current value relative to all other values over a lookback period. 100 is the highest, and 0 is the lowest. An optimistic reset condition occurs when the range rank for the Optix Index crosses above the 99th percentile. A new short signal triggers when the range rank crosses below the 48th percentile. Within five days of the cross, the 5-day rate of change for the EWK ETF must be <= 0%, and the 200-day moving average must be sloping downward. I use one final condition to avoid signals after a significant decline. Once the 252-day rate of change for the ETF crosses below -30%, a signal cannot occur again until it resets above 0%.

The Belgium ETF (EWK) has fallen 75% of the time after other signals

This model generated a short signal 20 times over the past 24 years. After the others, the Belgium ETF's future returns, win rates, and risk/reward profiles suggest one could profit from a short signal in the next few months. The signal shows positive returns at some point in the first month in 18 out of 20 instances.

The table shows performance for a short signal. So, positive values reflect a winning trade.

What the research tells us...

When the optimism index reverses from its recent range after a bounce within an established downtrend, it signals that traders have become more pessimistic about the future direction of stocks. Using the Optix index to measure that change in sentiment, similar setups to what we're seeing now have preceded falling prices for the EWK ETF in the near term.