How to use the indicator
Directional indicator with lead
As can be seen in the figures in this compendium article, sentix asset class sentiment in most cases has a lead time before the associated market developments. This is because rising (falling) preferences for an asset class indicate a willingness to buy (willingness to sell), which, with a certain time lag, also leads to transactions and corresponding price movements. Consequently, the sentix Asset Class Sentiment can be used as a directional indicator with predictive power for the various asset classes.
If the sentix Asset Class Sentiment enters extreme ranges, there is an increased probability (as with all directional indicators with a fixed value range) that a trend reversal will take place in the near future. In such phases, asset class sentiment takes on a contrarian character.
To determine the presence of extreme values, it can be helpful to convert the absolute sentiment values into Z-scores. In this context, it should be noted that in the case of time series that already have a history of several years and have nevertheless so far only exhausted a relatively small part of their theoretically possible range of values, there is probably a structural bias. In such cases, particularly interesting points of action can arise if the indicators advance into the range for which there are no observations yet. An example of this is the sentix IPO Sentimtent, which has been collected since mid-2005. Since its introduction, this indicator has not reached a positive value even once.
This is probably strongly related to the reluctance to invest in this asset class that investors adopted after the so-called TMT bubble burst at the beginning of the 2000s. If this index were to move into positive territory in the future, it would be a signal of a special kind. It would show that investors are giving up their refusal to accept IPOs and that there is thus still further potential for new issues. At the same time, however, it would have to be interpreted - in relation to the development of the stock market in general - as a late-cycle signal, since IPO business traditionally runs best towards the end of a bull market.
About the individual indicators of the sentix Asset Class Sentiment
The following time series are available for sentix Asset Class Sentiment:
- sentix Bitcoins Sentiment: The sentiment for cryptocurrency is the most recent of the sentix Asset Class Sentiment indices. It has been collected since December 2013. Thus, the time series is still too short to be able to make statistically significant statements in relation to the bitcoin price (in US dollars). However, sentiment trends, based on the levels observed so far, can already be identified.
- sentix Credits Sentiment: The sentix Credits Sentiment reflects the current preference of investors for corporate bonds relative to government bonds of the highest credit rating. Accordingly, it is best suited for estimating the development of spreads between corporate bonds and government bonds of the highest credit rating.
- sentix Emerging Markets Equity Sentiment: This sentiment indicator represents investors' perception of the attractiveness of emerging market equities at a given point in time. It is ideally suited for forecasting the development of broad emerging markets equity indices such as the MSCI Emerging Markets Index.
- sentix Emerging Markets Bonds Sentiment: Analogous to the equity sentiment for the emerging markets, this is the index for the bond markets of the emerging markets.
- sentix Real Estate Sentiment: According to investors, this indicator shows the attractiveness of real estate as an asset class. Specifically, investors assess their current preference for their home market here. Due to the structure of the sentix survey participants, the indicator thus reflects the assessments for the European real estate market as a whole and can be used as a forecasting tool for the price development there.
- sentix IPO Sentiment: The sentix IPO Sentiment signals the mood on the market for new issues. A good sentiment indicates a good placement ability of the issuers and correspondingly a tendency towards overvalued prices in an IPO, which is often followed by a relatively poor performance. The reverse is true for a (relatively) poor IPO sentiment.
- sentix Rohstoffe Sentiment: This sentiment index has a particularly good lead over broad-based commodity indices, e.g. the CRB index, which is also explicitly mentioned in the sentix survey as a reference for investor assessment.
Relative view of the sentix asset class sentiment: help with asset allocation
The sentix Asset Class Sentiment can not only be used for forecasting purposes and thus also the timing for entering certain asset classes. It is also a decision-making aid when it comes to asset allocation issues. For this purpose, the sentiment indices are not considered individually, but in relation to each other. In this relative view, it is possible to identify trends and trend reversals that exist between two or more asset classes. Weightings for the different segments can then be made accordingly.
Some examples of interaction with other sentix indicators
The sentix Asset Class Sentiment can generally be supplemented by indicators of the sentix Styles family, which are also collected with the same monthly special survey. The Styles indicators provide additional information for the equity segment for which time series on emerging market equities and new issues are provided within the sentix Asset Class Sentiment. They help, for example, to assess the current relative attractiveness of "large caps" and "small caps" as well as "growth" and "value" stocks.
The individual time series of the sentix Asset Class Sentiment can be supplemented by selected sentix indices in order to further improve forecasts, market timing or asset allocation. The following combinations, for example, appear to make sense:
- sentix Credits Sentiment: The indicator refers to the development of corporate bond spreads. These are essentially a function of uncertainty in the financial markets in general, which can be measured via volatility. In the sentix data set, the short-term sentix Neutrality Indices (for the 1-month view) give the best volatility signals - a high neutrality mostly indicates a pending increase in vola. There are sentix Neutrality Indices for equity and also for bond markets. Both time series can provide further guidance as measures of future volatility when forecasting the development of corporate bond spreads.
- sentix Emerging Markets Equity Sentiment and sentix Emerging Markets Bond Sentiment: Demand for emerging market securities is mostly a function of risk appetite: the higher the risk appetite, the more sought-after emerging market securities are. One measure of this risk appetite, or the risk aversion of investors, is the sentix Risk Aversion Index. It is a combination of several sentix Styles and sentix Asset Class Sentiment Indices. It can be used to determine whether investors are in risk-on or risk-off mode or in which direction their risk appetite is developing. This index can thus be used as a complement to pure emerging market sentiment indices in order to assess the future popularity of emerging market stocks.
- sentix Real Estate Sentiment: The sentix Sector Sentiment for real estate shares can provide additional information here, especially since it is collected (also monthly) with a time lag of one week from the sentix Asset Class Sentiment for real estate. Even if the prices of real estate shares and the prices of real estate may (at least temporarily) be subject to different influencing factors, a graphical comparison of the two time series shows that they complement each other well.
- sentix IPO Sentiment: When it comes to finding further benchmarks for the attractiveness of shares from an investor's point of view (and thus indirectly also for new issues), the sentix Strategic Bias can be used above all in the sentix data ring. This reflects the 6-month expectation for the development of various stock markets and is - similar to the sentix IPO Sentiment - a relatively smooth directional indicator. The sentix Strategic Bias for European equities can be used as a supplement to the IPO Sentiment. On the one hand, it can help to estimate the further development direction of the sentix IPO Sentiment, especially since it is even available in higher frequency, namely on a weekly basis. On the other hand, it can be used to identify the degree of maturity of a stock cycle, at the beginning of which IPOs regularly hardly play a role and at the end of which new issues are particularly sought after.
- sentix Commodities Sentiment: The sentix Commodities Sentiment reflects the general sentiment towards commodities. For commodities in particular, sentix provides indicators for crude oil and gold, namely the weekly sentix Sentiment (1-month expectation) and sentix Strategic Bias (6-month expectation). These indices can be used to identify which of the commodities or which commodity class - energy sources, (precious) metals - is currently benefiting from or being burdened by the general sentiment. At the same time, the quality of a general sentiment development can be revealed or at least put into perspective. If, for example, a rise in sentix commodity sentiment is due to a strong improvement in sentiment for gold, while the sentix indicators for crude oil are developing rather weakly, the driving force here could be increased uncertainty - and not, for example, increasing confidence in an improving global economy.
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