Time Frame: Medium-Term | Update Schedule: Daily by 6:00 PM EST | Source: SentimenTrader
Construction:
To create the Optimism Index, we looked at data based on:
We then ranked each measure against its historical normal to determine extremes. Because not all stocks or funds have all data, or have limited data, we then ran those data through price-based calculations to determine a fit that most closely resembled the original data. The goal was to reflect the moves that most determined investor sentiment while allowing us to expand the universe we monitor.
The Optix can go from 0 (maximum pessimism) to 100 (maximum optimism)./p>
The raw daily figure can be very noisy, so we suggest plotting a 5-day moving average for short-term moves or 20-day average for medium-term moves.
As with most contrary indicators, when sentiment gets extremely pessimistic (a 5-day average below 30), we would become alert to a possible reversal to the upside as expectations improve from very low levels. When sentiment is very high (a 5-day average above 70), then we would become concerned about a correction as expectations may have gotten too optimistic. If using a 20-day average, then the moves won't be as extreme, so it will generally be contained between 35 - 65.
