ISEE Sentiment Indicator
Categories: Marketing, Financial Theory
If we want to know how someone feels, a good course of action is usually just to ask them. If we want to know how a million someones feel, though, it would probably be pretty time-consuming to ask each of them in turn. That’s why, when investment analysts are trying to figure out how investors as a whole feel about the stock market, one of the things they look at is the ISEE sentiment indicator, also called the sentiment index. Like its name implies, it’s an indicator…of sentiment.
So...how do they do it? Surveys? Email questionnaires? Annoying automated telephone calls during the dinner hour?
Nope, none of the above. They simply throw the number of long call options purchased by individual investors, the number of long put options purchased by individual investors, and the number 100 into a calculation blender...and come up with a value that tells them what they want to know.
Here’s the formula:
ISEE = (LC/LP) x 100
LC is the number of new long call options bought and LP is the number of new long put options bought. When the indicator is below 100, it means that investors aren’t feeling all that optimistic—more long puts have been purchased than long calls—while a number above 100 means investors are feeling pretty groovy about the market situation. They’re fairly confident prices are going to go up.
Some might have noticed that we keep using the phrase, “individual investors.” That’s because the ISEE indicator doesn’t care about trades made by big firms or market makers. They’re not interested in how financial institutions feel about the market...they’re interested in how everyday, individual investors feel. So when those LCs and LPs are being tallied, it’s only new puts and calls ordered by individual investors that make the grade.
Related or Semi-related Video
Finance: What is the Barrons Confidence ...14 Views
Finance a la shmoop...what is the baron's confidence index
well Barron's is an old-tiny publisher of Wall Street data and today it's a
stodgy magazine catering to sophisticated financial readers well the [Magazine of barron's confidence index]
magazine has fiercely opinionated readers and it began to take advantage
of them first with simple old-school polls managed by its journalists before
computers were really a thing and then it began to codify an index the densely
packed brain power that it was surveying as to where the markets and the world
was heading so one outcome of this outbound research effort was the bond [Bond index equalling Barron's confidence index]
index or Baron's confidence index which is calculated by dividing the average
yield to maturity on what is generally double-a and triple-a grade bonds by the
average yield to maturity on what is generally double B ish grade bonds got
it? So triple A double A over the triple B'ers.. Well why would
you do this strange calculation in the first place
well it reflects its audience's attitude about credit risk the presumption among
pretty much everyone is that the safe bet ie US government paper is just a [100 dollar bill stamped safe]
reflection of inflation more or less and everything else or at least all other
credit is pegged to that very safe US paper so it sets the standard against
which the riskier credit is measured it's stable since the Barron's index is
a bond risk index it is in essence a calculation of its audience's confidence
in the US economy relative to everything else generally speaking in a good or
growing economy there are very few bankruptcies or defaults why well partly
just because times are good and people are buying you know stuff [People walking in a shopping mall]
yeah even stuff like that and if a given company individually stumbles well there
are often competitors who are doing well and who would likely acquire that
company maybe not for a huge premium but at least they'd pay off the company's
debt so it would be money good right for those triple B's so it's bonds even if
lowly rated would go back to par and everyone would get paid off as planned [company and competitor smiling]
so the index isn't an absolute measure of anything really it has to be viewed
relative to wherever it was trading last week
last month last year when investors are confident the spreads for bond yields
are narrower and the ratio is higher.. well think about the intermediate
bond yields but when the ratio is high and increasing it means that faith and [Bond yield graph appears]
the economy is growing right because that denominator yield shrinks because
grade triple B's instead of having to yield 12 percent yield like ten or eight
and inversely the ratio is lower and decreasing demonstrating less faith in
the economy when things go the other way and when the economy is really in the
toilet well expect to hear a lot of this sound [Tumbleweed flies past a man in a clothing store]