The State Of Greed, Euphoria And Vigor In The Stock Market

These days, every Wall Street research department seems to have a favoured measure of investor sentiment.

Understanding sentiment is important because short-term swings in the markets tend to be driven by emotions rather than fundamentals.

As such, extreme levels of sentiment are seen as contrarian indicators of what’s next for the market.

Some strategists even have their own proprietary indicators with their own colourful names.

Here are three indicators that measure greed, fear, panic, euphoria, and VIGOR.

1) Morgan Stanley’s Global Risk Demand Index (GRDI), which measures investors’ hunger for risk, is basically at neutral.

We should note that the GRDI is not an obvious contrarian indicator. Often times, greed is the fuel that’ll drive asset prices higher.

2) Citi’s Panic/Euphoria model, which is a blend of nine components of sentiment, has an extraordinary track record for predicting returns when it hit “euphoria” and “panic” levels.

“Our Panic/Euphoria model dipped but remained in neutral territory this week,” said Citi’s Tobias Levkovich on Friday. “This week’s Panic/Euphoria reading was 0.25; versus last week’s revised number of 0.32.”

So basically, it’s sending the same signal as the GRDI.

3) VIGOR, is a measure of trading volume intensity.

In a note to clients today, Bank of America Merrill Lynch’s Stephen Suttmeier warned that some of the major sentiment indicators he followed were reflecting complacency in the markets.

But the VIGOR measure was bullish.

“VIGOR moved to new recovery highs and confirmed the new S&P 500 highs,” said Suttmeier. “The next step is regaining the highs from 2007. The July 12th low is key support on VIGOR and holding this support keeps the longer-term trend for accumulation relative to distribution positive.”

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