A new way to track the vibes in the US stock market
The new Nations Investor Optimism Index measures how investors are feeling by slicing and dicing options prices.
A new tool launches today that traders can use to try to quantify one of the murkiest topics in markets: the vibes in the investment universe.
Nations Indexes is introducing the Nations Investor Optimism Index, which the press release describes as “an intuitive measure of optimism – as well as fear and greed – experienced by investors in the US stock market.”
The index is an amalgamation of three other metrics from the Chicago-based firm: the VolDex (which tracks the implied volatility of the SPDR S&P 500 Trust), the TailDex (which tracks the price of options that would pay off if stocks plunged, i.e. a tail event), and the RiskDex (a gauge of the price of bearish options on US stocks relative to bullish ones). As a general matter, when these gauges are high, investors’ attitudes are down in the dumps and fear is rampant.
The Investor Optimism Index is equal to 100 minus the average of the percent rank for each of those metrics relative to the past years. The index's most recent reading is 38.8, suggesting sentiment is slightly downbeat but still markedly better relative to earlier in August.
“I think it can be indicative re: short-term moves and the likelihood of outsized moves, such as when the index is below 25,” said Scott Nations, President of Nations Indexes, in an email to Sherwood News. “I also hope investors will use it as a contrarian indicator, ‘Oh look, the entire world is very optimistic, the Optimism Index is at 95 so maybe it's time for me to be fearful rather than greedy.’ The opposite applies if the index is at 10.”
Nations’ indexes have been receiving some extra praise and attention in the volatility community lately, as some were much better-behaved during last week’s epic spike in the VIX Index. Many experts contend the surge in the so-called “fear gauge” was somewhat artificial in nature based on how that index is constructed.
Most readily-available sentiment gauges are survey based – that is, they ask different types of investors about their expectations for stock prices, or what their current positioning is like. Other price-based technical indicators that can be used to infer sentiment often have a strong momentum/trend-following component, or are tied to volumes traded (like the put-call ratio).
