Investing 101

Sentiment can be thought of as the overall mood of the financial market. This gauge of the median psychological state reflects the price movements in the market. 

Essentially, rising prices gauge bullish sentiment, while falling prices signal a bearish sentiment towards the security. 

On a short term basis, price movements are not always or entirely based on fundamentals. Several factors come into play - from risk management to exogenous factors - and these include the buy and sell activity driven by psychology and sentiment.

As an example, sentiment in the market turned bearish towards the end of 2021 when inflation was nearing all-time highs, supply couldn’t keep up with the rising demand and company valuations began to appear stretched . 

After almost 2 years of double-digit price appreciation, thanks to the injection of wealth into the economy and quantitative easing, investors finally began to suspect the “party” was coming to an end - and that a correction was on the way. This eventually led to the start of the H1 2022 bear market. 

Here are a few examples of popular indicators which can be used to measure market sentiment:

1. **The VIX.** 
Also known as the fear index, the VIX gauges the price of 1M and 2M options on S&P 500. A rising VIX implies that there is more fear in the market and investors seek protection from downside . 
2. **The AAII Investor Survey**
The AAII indicator is one of the longest-standing surveys of market sentiment. Starting in 1987, the AAII Investor Sentiment Survey queries investors’ views on the market in the next 6 months and provides a gauge to determine moments of extreme exuberance or gloom.
3. **The High-Low Index**
This index tracks the number of stocks making 52-week highs (prices hitting the highest level observed over the last year) versus the number of stocks hitting 52-week lows. When the index value is below 30, that means stocks are trading near lows and investors have a bearish market outlook. On the other hand, a value above 70 means stocks are trading towards their highs and investors have a bullish market outlook. 
4. **Bullish Percent Index**
The BPI measures the number of stocks with a bullish pattern based on point and figure charts. Similar to candlestick charts, P&F charts look at the degree of asset movement however without considering a specific time period. Neutral markets usually have a BPI of 50%, overbought markets have a reading of 80% or higher and oversold markets have a BPI of 20% or below.  
5. **Moving Averages** 
The most commonly used moving average is the 50 to 200 day moving average. When the 50-day moving average crosses above the 200-day moving average (golden cross), this indicates momentum has shifted to the upside, suggesting bullish sentiment. On the other hand, the 50-day moving average falling below the 200-day moving average (death cross), indicates momentum shifted to the downside and hence bearish sentiment. 


Sentiment is the overall mood of the financial market. This gauge of the median psychological state reflects the price movements in the market. 

Market Sentiment

Technical Indicators 

Carry is the return you get for holding on any security. Bonds, futures and even equities have carry.

**Bonds**

Bond carry is defined as the current yield you receive in payment from the bond, plus a capital gains component - the price appreciation you get when the bond becomes shorter. 

To explain this latter point, shorter bonds have lower interest rates than longer ones (in general but not always).

When time passes a bond “rolls down the curve”: maybe the interest rate for a 5Y bond is 10% but for a 4Y bond it is 7%. Since prices move inversely to yields, as the bond becomes shorter-lived its price rises.

**Futures**

Future carry is the difference between the price of the future and the price of the underlying commodity. 

For example if a barrel of Oil costs $110 but the 1Y future for oil trades at $100, then you can buy for $100 something that’s worth $110. That means you have a 10% ($110 / $100 - 1) carry embedded in the future if the price of Oil does not move.

**Equities**

The concept of carry can be applied to a degree also to equities, as they carry dividends.

A share option that is worth $100 and carries a $5 dividend per year has a carry of 5%. 

Of course when the dividend goes in payment, the share will go down by a commensurate amount, but the expectation is that the value will be regenerated as the company will be able to pay the dividend again next year.

**Foreign Exchange**

Currency crosses have carry as well.

Taking the case of EURUSD, holding the cross is like holding a EUR bond and selling a USD bond. 

If EUR interest rates are 5% and USD interest rates are 3%, then holding the cross has an intrinsic carry of 2% (= 5% from the long EUR position minus 3% from the short USD position).
