Time Frame: Long-Term | Update Schedule: Daily | Source: SentimenTrader
Construction:
When public opinion reaches a consensus, it is usually wrong - they get too bullish after prices have risen, and too bearish after they have already fallen.
Because of that tendency, we very often see extremes in opinion right before major changes in trend. When the public reaches a bullish extreme - a great majority thinks prices will keep rising - then we most often see prices decline going forward instead. And when they become too bearish, then prices tend to rise.
To calculate this gauge of public opinion, we have created an index based on many of the established surveys currently in existence, some of which are noted below, along with other measures of sentiment, such as from the options and futures markets.
The combination of that data is the foundation of the Optimism Index, or Optix.
No matter what population the survey monitors, it tends to correlate very highly with all the other populations. People tend to think alike, and it's rare to see any of the surveys diverge too far from all the others. The correlations among them are very high, and have been consistently so for many years.
Like most sentiment data, this one is a contrary indicator. When optimism becomes too high, we should look for prices to stall out or decline; when it is too low, we should look for rallies.
When the Optix moves above the red dotted line in the chart, it means that compared to other readings, we're seeing a statistically extreme value. The bands are based on the past few years of trading, but you also want to look at the absolute level - if it's at 90%, then there's no question we're seeing an historic level of bullish opinion. Watch for readings above 80% (or especially 90%) to spot those dangerous times when the public is overly enthusiastic about a commodity.
Conversely, when the Optix moves below the green dotted line, then the public is too pessimistic about the commodity's prospects for further gains compared to their opinion over the past year. Looking for absolute readings under 20% (or especially 10%) can lead to good longer-term buying opportunities.
These aren't necessarily part of our calculations, but they are additional sources of commodity-related sentiment data.
