One thing that has developed over the years is the deeper study of sentiment, and how it can influence the movement of capital markets. The one sentiment indicator commentators commonly refer to is the Vix, the so called the fear and greed index. Sentiment can play a large part in investor’s decision-making, Daniel Kahneman, a psychologist who won the Nobel prize for economics is a testament to the increase in weight investors are paying to the subject. The famous Mario Draghi quote "do whatever it takes", that is often credited with restoring faith in the euro area, is a good example of a change in investor sentiment leading to a sharp fall in peripheral bond yields.
Citi, like most large Investment banks, now offer as part of their research coverage insights on a regular basis into risk appetite and investor sentiment. The Citi investor sentiment index is simple in its idea, capturing data on the number of Bloomberg news stories containing the keyword "Bullish" or the keyword "Bearish". The chart of how the use of the words has changed in percentage terms has been included in this blog and it makes interesting studying. Citi has plotted the chart against its Global Risk Aversion Macro Index (inverted).
The chart starts in 2009, risk aversion was still very high (the black line is low on the chart), yet the use of the word bullish was already appearing more times than bearish (the red line is high), sentiment as we know improved rapidly and risk appetite returned, as depicted in the chart. Looking through the years since 2009, in 2010 we had the Dubai crisis, August 2011 fears over the impact of the US government debt downgrade, 2012 the euro strain. In each case the increased use of the word bearish was a lead indicator for a reduction in investor risk appetite.
Looking at recent history, from the middle of last year the bearish word usage increased, probably on the back of the expected impact of the Fed tapering its bond purchase program. Unlike previous examples risk appetite remained intact during this period. Since the start of the year there has been a steady increase in the word bullish being used, to a recent peak of roughly 30% more than the word bearish. In the past week or so there appears to be a sudden move back in the opposite direction, as the use of the word bearish has increased. At the time of the report (22nd April) the word bullish and bearish now currently appear in equal numbers. In a similar vein to last year, so far risk appetite has fallen slightly but remains elevated, at least relative to what is has been since the financial crisis. The increase in risk appetite has been reflected in fund flow data as equities have continued to attract new capital investment.
As we know fear and greed drive asset prices, what does appear clear from this chart is when the word bearish is being used 50% more of the time than the word bullish, investor sentiment is hitting rock bottom, fear is taking over and it is time to polish up the buying boots.