THE SENTIMENT DRIFT

In his survey of the literature on post earnings announcement drift, Bernard (1993) discuss evidence concerning market prices underreact to analysts forecasts. He explains that the post announcement stock prices for firms that have reported “good news” tend to drift up, whereas the prices for firms that have reported “bad news” tend to drift down. It pays to hold stocks that have experienced recent large positive earnings surprises, because the market does not fully adjust to the good news. Instead, the market adjusts over the three quarters that follow an announcement.

Now instead of earnings announcement replace it with the RSR sentiment readings, which are similar to the announcement of the market sentiment, call it say emotional earnings. Ad you can see whenever RSR has announce readings on a monthly basis, we see a similar drift up and drift down. Take for example the negative readings. After markets saw an increase in negativity from MAR 2008, the negativity continued to drift up till Sep. When negativity saw a drop in OCT, they continued to drift for OCT and NOV. The trend generally drifted after the first change of trend. Now we have an increase in negative readings again, if the previous drifting up is any indication, the negativity should rise into at least JUN and JULY.

We have been talking about positivity in MAR lows till MAY. Now that MAY is behind us and if SELLING in MAY did push up RSR sentiment a bit higher, we are not excited about JUN and JULY readings. Above this we clients and readers are already raising positive feelers regarding SIF’s limits and how sentiment readings are useless in the light of corporate events. Well we beg to differ, not that we don’t believe that corporate events can bring in a large volatility, but that markets don’t change a secular trend because of a corporate event.

Above this experts 6 months reading are still too high at 71.9. The longer the time frame of sentiment readings smoother the data (60-30). The shorter the time frame more volatile the readings can get 90-10. This suggests than 6 months readings are worrying rather than encouraging. BET 6 months readings are on also a new high, which continue to suggest more bullish extreme and negative than otherwise. There is also enough negativity on 1 month to warrant a turn back 47.1, 44, 50, 50. Even the trust index has turned down. We continue to look at a tough few months ahead.

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