Physics-Based Forecasts of Investor Sentiment
We provide two-week to six-month forecasts of investor sentiment related to major stock markets.
Our forecasts indicate naturally occurring shifts in sentiment that create tailwinds and headwinds for the markets. Some refer to these naturally occurring shifts as changes in animal spirits. Shifts occur periodically and are described as changes between:
- Investor optimism and pessimism
- Risk-on and risk-off
- Euphoria and panic
- Market resilience and vulnerability
A shift between naturally occurring optimism and pessimism acts as an exogenous catalyst for a dramatic price change when there is an economic need for a price change.
To build these forecasts, we exploit variables related to those described in the Federal Reserve Bank of Atlanta's 2003 working paper "Playing the Field." This paper and other independent research indicate that solar energy variation affects human mood. Our physics-based drivers are objective measures of forces that cause solar energy variation.
The main advantage of physics-based sentiment shifts is that we can predict the shifts several months in advance.
Our research indicates that the impact of the physics-based drivers on the emotions of investors has been stable over many decades. Using these drivers, our forecasts indicate potential shifts in investor sentiment several months out. Our forecasts do not predict news and events. Instead, they forecast likely human reaction to news and events.
Physics-based drivers:
- Are objective and rules-based; they are not affected by human judgement on an ongoing basis.
- Are independent of and external to the markets, making them complementary to most investment strategies.
- Do not use time series analysis.
In an ideal world, the movement of the markets would be determined by economic and fundamental factors alone – solar energy variation would have no impact. Yet, the historical record indicates that this is not the case. We have found that natural shifts in investor optimism have a greater impact than is commonly recognized (example).
Investment professionals will make more effective decisions about future market conditions if they recognize and adjust for the naturally occurring shifts in sentiment.
Our research is described in this Institutional Investor article. Additional background is found in this LinkedIn article.
For Professional Investors -
- We provide clients with multi-month forecasts and strategy sessions
followed by periodic status reports. - We create detailed sentiment forecasts for US large-cap stock market (S&P 500, S&P 500 Equal Weighted, DJIA). We also create forecasts for the Russell 2000, S&P Europe 350, FTSE 100, and TOPIX.
- We also engage in consulting projects to transfer our tools and algorithms to a client's quantitative team, accelerating the development of their own physics-based investment tools.