Here’s another way to gauge market sentiment. Watch for changes in the securities lending spread of different industries to get a sense of major sentiment shifts.
The lending spread is the spread between the funding rate and the average securities lending rate for a given index of stocks and represents the average cost to borrow stock for shorting. Thus as this price, ie. lending spread, for borrowing stock changes, one can get a sense of the supply/demand situation in the market.
When the lending spread changes dramatically it could be a signal that there has been a sudden sentiment shift:
AllAboutAlpha: For example, telecommunications stocks were on a tear at the beginning of last month, with Verizon and AT&T posting strong gains. Then, on October 5, the securities lending rates spiked. The S&P Securities Lending Spread Indices aren’t published until the next day before the open. On October 6, telecom stocks continued to march higher, even though the indices suggested otherwise.
Sure enough, through October 12, those stocks crashed. Later in the month the very same index showed market expectations that the stocks were headed toward recovery; clearly there was no shorting demand through the final week of October, even though stock prices fell on October 26.
It is the same kind of story across other sectors and capitalizations. For example, from November 5th to November 6th, the S&P 500 Securities Lending Financials Spread Index got easier to borrow by 45%, while the S&P 500 Securities Lending Industrial Spread Index was up by 34%.
If one looks at some of the equity leaders in those two particular areas, one would find that they went up – nicely – in the day or two that followed. Financials, for example, chalked up nice gains November 9th and November 11th, while Industrials also fared reasonably well.
In others words, it appears that the S&P securities lending indices can be used as a leading indicator for stock prices.
Conveniently, in September S&P just launched lending spread indices for major industries. Check out the embedded file below. They might be worth watching.