One of the more reliable indicators of stock market sentiment is Citi’s proprietary Panic/Euphoria model.
“This week’s Panic/Euphoria reading was 0.52; versus last week’s revised number of 0.49, which points to two weeks in a row of euphoric signals, matched by increased money flows,” said Citi’s Tobias Levkovich in a note to clients on Friday.
This is a contrarian indicator, which means euphoria is a bad sign for things to come.
“Euphoria readings indicate the market may retreat with an 83% historical probability of losses in the next 12 months,” added Levkovich.
Most measures of sentiment rely on surveys of investors. However, Citi’s Panic/Euphoria model relies heavily on market based measures that are believed to reflect sentiment.
Components of the model include NYSE short interest ratio, margin debt, retail money funds, the put/call ratio, gasoline prices and the ratio of price premiums in puts versus calls”
“Euphoric sentiment raises deep concern.”
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