How I use the Intermediate Term Optimism Index

Dean Christians
2021-09-14
Let's review a trading signal concept that uses the SentimenTrader Intermediate-Term Optimism Index to identify a reversal from a pessimistic extreme.

One day in the future, the stock market will experience a correction, and investor sentiment will turn from optimism to pessimism. Luckily for us, Jason created the best toolbox of sentiment indicators on the planet.

Designing a good trading signal with sentiment indicators is similar to the methodologies I use for price-based alerts. The model should identify a sharp and sudden reversal from an extreme market condition.  

Today's note aims to share a concept that identifies when the Intermediate-Term Optimism Index reverses from a pessimistic extreme.

COMPONENT

  • SentimenTrader Intermediate-Term Optimism Index (Optix)

THE CONCEPT

The Intermediate-Term Optimism Index (Optix) signal identifies when the N-day net change in the Optix Index registers a sharp reversal upward from a pessimistic extreme. The model will issue an alert based upon the following conditions.

SIGNAL CRITERIA FOR THE S&P 500 ETF (SPY)

  1. If the intermediate-term optimism index crosses below 22%, then the pessimistic reset condition is active. 
  2. If the reset condition is confirmed and the 4-day net change in the optimism index crosses above 10% and the 5-day rate of change for the SPY ETF > 0% within five days of the cross, then buy.
  3. If the intermediate-term optimism index crosses above 70%, then the optimistic reset condition is active. i.e., the optimistic reset condition screens out duplicate signals. 

CURRENT DAY CHART

HOW THE SIGNAL PERFORMED

Results look good, especially the 1-month timeframe.

OPTIMISM COUNT

As the following chart shows, investors can remain in an optimistic mood for a long time.

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