Sentiment Analysis

Financial market sentiment surveys have long been a popular key to unlocking the opinions of principal market protagonists. But all too often these surveys feature a little-discussed Achilles Heel: that analysts figure in among those questioned. However we do not suggest that their opinions are less valid than that of traders or investors. The problem lies in the embarrassing admission that analysts carry no positions, and can therefore change opinions from one day to the next without trading a single stock, bond or dollar. As the objective of any survey is to identify where and when market operators are likely to act, this concession threatens the validity of the entire exercise..

Since 2002 we have asked some 170 medium-term institutional investors at the Deutsche Börse AG, with trading horizons between 3 weeks and 12 months, for their market opinions. Fund and asset managers in the DAX and TecDAX, as well as notable private investors in the case of the latter, are asked on a weekly basis if the index will find itself higher, lower or at the same price in one months time. By limiting the survey to market participants who carry risk in equity indices, we attempt to gage the psychological, as well as the material commitments to underlying positions. That is, someone who is invested will hardly ever give a negative forecast about ones holdings. In the same way, one who has just squared a position is unlikely to express positive prospects for the former strategy. We are aware that the market does not turn on this group alone. But like all surveys, it is important that the behaviour of the sample is representative of the population.

With the help of this survey we are able to gain a deeper look into the development of the stock market which would not be possible using conventional analysis. The insights of the survey have been indispensable; accurately predicting the long-term bear market from 2000 to 2003, and equally, the subsequent recovery. Even more, we can ascertain traders positions, calculate an average entry price, and consequently predict future supply and demand.