Section 8 - Chapter 3 - Sentiment Measuresfrom External Data

Section 8 - Chapter 3 - Sentiment Measuresfrom External Data - Presented by Rohan Sharma - The CMT Coach - Chartered Market Technician CMT Level 1 Study Material - CMT Level 1 Chapter Wise Short Notes - CMT Level 1 Course Content - CMT Level 1 2025 Exam Syllabus Visit Site : www.learn.ptaindia.com and www.ptaindia.com

1. Chapter 3 - Sentiment Measures from External Data Section 8 – Sentiment Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

2. Agenda Sentiment Measures from External Data AAII Survey Investors Intelligence Magazine Covers Mutual Fund Cash/Assets Ratio Money Market Fund Assets This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

3. AAII Sentiment Survey Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

4. AAII Sentiment Survey Key Facts About the AAII Sentiment Survey 1. Survey Frequency: Conducted weekly since July 1987. 2. Measures Sentiment: Investors classify themselves as Bullish, Bearish, or Neutral on the market’s direction over the next 6 months. 3. Contrarian Indicator: High bearishness often signals market bottoms, while excessive bullishness can indicate market tops. 4. Sample Group: The survey polls AAII members (retail investors), providing insight into small investor sentiment .

5. AAII Sentiment Survey Key Facts About the AAII Sentiment Survey 5 . Historical Averages (since 1987): o Bullish: ~37.5% o Neutral: ~31.5% o Bearish: ~31.0% 6. Market Correlation: o Extreme readings often precede reversals. o High bearish sentiment (above 50%) has historically preceded market rebounds. o High bullish sentiment (above 50%) has often signaled market tops.

6. AAII Sentiment Survey Key Facts About the AAII Sentiment Survey 5 . Historical Averages (since 1987): o Bullish: ~37.5% o Neutral: ~31.5% o Bearish: ~31.0% 6. Market Correlation: o Extreme readings often precede reversals. o High bearish sentiment (above 50%) has historically preceded market rebounds. o High bullish sentiment (above 50%) has often signaled market tops.

7. AAII Sentiment Survey Cheat Sheet: AAII Sentiment Interpretation Bullish (%) Bearish (%) Neutral (%) Market Interpretation >50% <20% <30% Overly optimistic—potential market top 40-50% 20-30% 25-35% Bullish bias, but not extreme 30-40% 30-40% 30-35% Balanced sentiment, normal conditions 20-30% >40% 30-35% Bearish bias, potential buying opportunity <20% >50% <30% Extreme fear—potential market bottom

8. AAII Sentiment Survey 📈 Historical Examples of AAII as a Market Signal 1. March 2009 (Financial Crisis Bottom) o Bullish: ~19% (very low) o Bearish: ~70% (extreme fear) o 🔼 S&P 500 surged afterward 2. December 2018 (Fed Rate Hike Fears) o Bullish: ~20% o Bearish: ~50% o 🔼 Market rebounded strongly in 2019 3. November 2021 (Market Peak) o Bullish: ~48% o Bearish: ~22% o 🔽 S&P 500 peaked and declined in 2022

9. AAII Sentiment Survey Limitations & Caution • Not a standalone indicator: Best used alongside other technical and fundamental metrics. • Retail investors can be wrong for extended periods: Sentiment may remain extreme for weeks or months before a reversal. • Short-term noise: Weekly readings can be volatile—focus on trends rather than single-week data . Takeaway : How to Use the AAII Survey in Trading & Investing ✔ Extreme bearishness → Look for buying opportunities. ✔ Extreme bullishness → Exercise caution, consider taking profits. ✔ Compare with other indicators → Cross-check with VIX, put/call ratios, and market trends. ✔ Use as a contrarian tool → Retail investors tend to be overly optimistic at tops and overly pessimistic at bottoms .

10. Investors Intelligence (II) Sentiment Survey Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

11. Investors Intelligence (II) Sentiment Survey The Investors Intelligence (II) Sentiment Index is a widely used contrarian market indicator that tracks the sentiment of financial newsletter writers. It is considered more reliable than individual investor surveys because professional advisors tend to be more informed and rational . data. 📌 Key Facts About Investors Intelligence (II) Sentiment Survey 1. Survey Frequency: Published weekly since 1963. 2. Measures Sentiment: Categorizes financial newsletter writers into three groups: o Bullish (expect market to rise) o Bearish (expect market to fall) o Correction (Neutral) (expect market pullback but no major decline)

12. Investors Intelligence (II) Sentiment Survey 3. Contrarian Indicator: o Extreme bullishness (>60%) may signal a market top. o Extreme bearishness (>40%) may indicate a market bottom. 4. Market Predictive Power: o Professional newsletter writers tend to follow trends but excess optimism or pessimism often precedes market reversals. 5. Historical Averages: o Bullish: ~47-50% o Bearish: ~25-30% o Correction (Neutral): ~20-25%

13. Investors Intelligence (II) Sentiment Survey 📊 Cheat Sheet: Investors Intelligence Interpretation Bullish (%) Bearish (%) Correction (%) Market Interpretation >60% <15% <25% Overly optimistic – potential market top 50-60% 15-25% 20-30% Bullish, but caution warranted 40-50% 25-35% 20-30% Balanced market sentiment 30-40% 35-40% 20-30% Bearish, possible buying opportunity <30% >40% >25% Extreme fear – potential market bottom

14. Investors Intelligence (II) Sentiment Survey 📈 Historical Examples of II as a Market Signal 1. March 2009 (Financial Crisis Bottom) o Bullish: ~28% o Bearish: ~47% o 🔼 S&P 500 rebounded strongly afterward 2. December 2018 (Fed Rate Hike Panic) o Bullish: ~30% o Bearish: ~45% o 🔼 Marked the end of a major correction 3. November 2021 (Pre-2022 Bear Market) o Bullish: ~60% o Bearish: ~18% o 🔽 S&P 500 topped and declined in 2022

15. Investors Intelligence (II) Sentiment Survey Limitations & Caution • Not a standalone indicator: Best used in combination with technical and fundamental analysis. • Trends can persist: Sentiment can stay extreme for weeks before a reversal occurs. • Professionals also get it wrong: While more informed than retail investors, newsletter writers can follow trends rather than anticipate them . 🔹 Takeaway: How to Use Investors Intelligence in Trading & Investing ✔ Extreme bullish readings (>60%) → Exercise caution, consider profit-taking. ✔ Extreme bearish readings (>40%) → Look for buying opportunities. ✔ Combine with other indicators → Check VIX, put/call ratios, and market breadth. ✔ Use as a contrarian tool → When everyone is bullish, be cautious; when everyone is bearish, look for value .

16. Magazine Covers as a Sentiment Tool Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

17. Magazine Covers as a Sentiment Tool The Magazine Cover Indicator is a contrarian market sentiment tool that suggests that when a financial trend or market theme reaches mainstream media (especially major magazine covers), it may be near exhaustion—either a market top or bottom . 📌 Key Facts About the Magazine Cover Indicator 1. Contrarian Signal: o Bullish covers → Often signal a market top (euphoria stage). o Bearish covers → Often signal a market bottom (fear stage). 2. Reasoning: o By the time a trend is widely recognized, it is usually priced into the market. o Extreme optimism or pessimism in mainstream media suggests crowd sentiment is at an extreme, making a reversal more likely .

18. Magazine Covers as a Sentiment Tool 📌 Key Facts About the Magazine Cover Indicator 3. Works Best With Extreme Covers: o Covers declaring "The Death of Stocks," "End of Oil," or "Tech Bubble 2.0" often mark turning points. o Mildly positive or negative covers are less reliable as indicators. 4. Most Effective on Long-Term Trends: o This tool is more useful for macro market cycles rather than short-term trading. 5. Not 100% Reliable: o While it has worked historically, some magazine covers reflect genuine structural changes rather than sentiment extremes.

19. Magazine Covers as a Sentiment Tool 📌 Cheat Sheet: How to Interpret Magazine Covers Cover Type Market Interpretation Typical Reaction Overly Bullish (e.g., "Stocks Will Keep Soaring!") Possible Market Top Sell / Reduce Risk Euphoric Industry Focus (e.g., "The Unstoppable Tech Boom") Sector Overvaluation Consider taking profits Overly Bearish (e.g., "The Death of Stocks") Possible Market Bottom Buy / Increase Exposure Doomsday Scenarios (e.g., "Financial Crisis 2.0") Extreme Pessimism Market may recover soon Balanced / Neutral Cover No strong signal Ignore

20. Magazine Covers as a Sentiment Tool Historical Examples of Magazine Cover Indicator 1. August 1979 – BusinessWeek’s “The Death of Equities” o Declared stocks were "dead" after a long bear market. o 🔼 S&P 500 began a 20-year bull run afterward. 2. December 1999 – Time Magazine’s “The New Economy” (Tech Boom Hype) o Celebrated the dot-com revolution as unstoppable. o 🔽 Nasdaq crashed in 2000, marking the dot-com bubble burst. 3. June 2005 – The Economist’s “The House of Cards” (Real Estate Bubble Warning) o Correctly predicted the housing bubble, but market kept rising for 2 more years .

21. Magazine Covers as a Sentiment Tool Historical Examples of Magazine Cover Indicator 4 . October 2008 – The Economist’s “World on the Edge” (Financial Crisis Panic) o Global recession fears at their peak. o 🔼 Stock market bottomed in March 2009 and began a major recovery. 5. November 2021 – The Economist’s “The Everything Boom” o Highlighted soaring asset prices across all markets. o 🔽 S&P 500 peaked weeks later, entering the 2022 bear market .

22. Magazine Covers as a Sentiment Tool Limitations & Cautions • Timing Issues: o Magazine covers mark sentiment peaks, but markets may take weeks or months to reverse. • Not Every Cover is Predictive: o Some magazine covers reflect real fundamental shifts, not just extreme sentiment. • Better for Long-Term Investors: o Short-term traders should combine this tool with other sentiment indicators like VIX, put/call ratio, and market breadth . 🔹 Takeaway: How to Use Magazine Covers in Investing ✔ Extreme bullish covers → Consider reducing exposure. ✔ Extreme bearish covers → Look for buying opportunities. ✔ Use in combination with other sentiment indicators for confirmation. ✔ Works best on broad market trends, not short-term trades .

23. Magazine Covers as a Sentiment Tool Limitations & Cautions • Timing Issues: o Magazine covers mark sentiment peaks, but markets may take weeks or months to reverse. • Not Every Cover is Predictive: o Some magazine covers reflect real fundamental shifts, not just extreme sentiment. • Better for Long-Term Investors: o Short-term traders should combine this tool with other sentiment indicators like VIX, put/call ratio, and market breadth . 🔹 Takeaway: How to Use Magazine Covers in Investing ✔ Extreme bullish covers → Consider reducing exposure. ✔ Extreme bearish covers → Look for buying opportunities. ✔ Use in combination with other sentiment indicators for confirmation. ✔ Works best on broad market trends, not short-term trades .

24. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

25. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool The Mutual Fund Cash-to-Assets Ratio measures the percentage of mutual fund assets held in cash versus invested in stocks and other securities. It serves as a contrarian indicator, reflecting investor sentiment and risk appetite . 📌 Key Facts About the Mutual Fund Cash/Assets Ratio 1. Definition: o The ratio represents the proportion of a mutual fund’s total assets that are held in cash rather than invested. 2. Sentiment Indicator: o High cash levels → Mutual fund managers are risk-averse (bearish sentiment). o Low cash levels → Mutual fund managers are fully invested (bullish sentiment ).

26. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool Key Facts About the Mutual Fund Cash/Assets Ratio 3. Contrarian Signal: o Extremely low cash levels → Possible market top, as funds have little dry powder left to buy. o Extremely high cash levels → Possible market bottom, as funds may soon reallocate cash into stocks. 4. Historical Averages: o Long-term average cash holdings: ~4-5% of total assets. o Below 3% → Excessive optimism (potential warning sign). o Above 6% → Excessive fear (potential buying opportunity). 5. Fund Managers vs. Retail Investors: o Unlike retail investors, mutual funds are typically required to remain mostly invested, making their cash levels a useful measure of institutional sentiment.

27. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool Cheat Sheet: How to Interpret the Mutual Fund Cash Ratio Cash Ratio (%) Market Sentiment Market Interpretation <3% Overly Bullish Possible Market Top (Funds fully invested) 3-4% Bullish Optimistic but not extreme 4-5% Neutral Normal Market Conditions 5-6% Bearish Cautious Outlook, Potential Buying Opportunity >6% Extremely Bearish Possible Market Bottom (Funds holding excessive cash)

28. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool Historical Examples of Mutual Fund Cash Ratio as a Market Signal 1. March 2000 (Dot-Com Bubble Peak) o Cash Ratio: ~3% (Very low) o Market Reaction: 🔽 S&P 500 crashed afterward 2. March 2009 (Financial Crisis Bottom) o Cash Ratio: ~6-7% (Extreme fear) o Market Reaction: 🔼 S&P 500 began a decade-long bull run 3. December 2018 (Fed Rate Hike Sell-Off) o Cash Ratio: ~5.5% o Market Reaction: 🔼 Strong rebound in 2019 4. November 2021 (Pre-2022 Bear Market) o Cash Ratio: ~3.5% (Low cash, high optimism) o Market Reaction: 🔽 S&P 500 topped and declined in 2022

29. Mutual Fund Cash-to-Assets Ratio as a Sentiment Tool Limitations & Cautions • Not a precise timing tool: Markets can stay overbought or oversold for extended periods. • Different fund strategies: Some funds always hold more cash than others due to investment mandates. • Better for long-term trends: Works best for identifying major turning points, not short-term trading . 🔹 Takeaway: How to Use the Mutual Fund Cash Ratio in Investing ✔ Cash ratio below 3% → Reduce risk, as markets may be overheated. ✔ Cash ratio above 6% → Consider buying, as markets may be near a bottom. ✔ Combine with other sentiment indicators for stronger signals. ✔ Use for long-term market cycles, not short-term trades .

30. Money Market Fund Assets as a Sentiment Tool Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia

31. Money Market Fund Assets as a Sentiment Tool The Money Market Fund (MMF) Assets indicator tracks the total amount of money held in money market mutual funds , which are low-risk, short-term investment vehicles. It is a contrarian sentiment indicator , helping investors gauge market sentiment and risk appetite . Key Facts About Money Market Fund Assets 1. Definition: o Money market funds are considered a safe haven during times of uncertainty. o Investors move money into MMFs when they are fearful and out of MMFs when they gain confidence in riskier assets (stocks, bonds). 2. Sentiment Indicator: o High MMF balances → Indicates fear or risk aversion, often near market bottoms. o Low MMF balances → Indicates confidence or risk-seeking behavior, often near market tops.

32. Money Market Fund Assets as a Sentiment Tool Key Facts About Money Market Fund Assets 3. Contrarian Signal: o Extremely high MMF levels → Bullish (lots of sidelined cash that could flow into risk assets). o Extremely low MMF levels → Bearish (investors are fully allocated, leaving little buying power). 4. Historical Averages: o MMF assets typically fluctuate between $3 trillion and $5 trillion, but spikes occur during crises. o Sharp inflows → Investors are fleeing risk assets. o Sharp outflows → Investors are confident in riskier markets. 5. Used by Institutional and Retail Investors: o MMFs are popular among hedge funds, corporations, and retail investors as a parking place for cash .

33. Money Market Fund Assets as a Sentiment Tool Cheat Sheet: How to Interpret Money Market Fund Assets MMF Asset Level Market Sentiment Market Interpretation Extremely High (> historical norm) Fearful Potential Market Bottom (Cash ready to move into stocks) Rising MMF Levels Growing Caution Investors reducing exposure to stocks Stable MMF Levels Neutral No strong signal Declining MMF Levels Risk-On Investors shifting into stocks, but watch for overheating Extremely Low (< historical norm) Euphoria Potential Market Top (No cash left to push stocks higher)

34. Money Market Fund Assets as a Sentiment Tool Historical Examples of MMF Assets as a Market Signal 1. March 2009 (Financial Crisis Bottom) o MMF Assets Surged → Investors were hoarding cash. o 🔼 Stock market bottomed and began a decade-long bull run. 2. March 2020 (COVID Crash) o MMF Assets Hit Record Highs (~$4.7T) → Extreme fear. o 🔼 S&P 500 rebounded sharply afterward. 3. Late 2021 (Pre-2022 Bear Market) o MMF Assets Declined Sharply (~$4T to $3.6T) → Excessive risk-taking. o 🔽 Stock market peaked and declined throughout 2022.

35. Money Market Fund Assets as a Sentiment Tool Limitations & Cautions • Not a precise timing tool: MMF assets can stay elevated or depressed for long periods. • Needs confirmation from other indicators: Best used alongside VIX, put/call ratio, and investor sentiment surveys. • Institutional vs. Retail Differences: Some MMF assets are held for corporate treasury management, not just investment sentiment . 🔹 Takeaway: How to Use MMF Assets in Investing ✔ MMF levels at record highs → Bullish signal, potential buying opportunity. ✔ MMF levels dropping sharply → Caution, as cash is fully deployed into risk assets. ✔ Combine with VIX, equity flows, and mutual fund cash ratio for stronger signals. ✔ Best for long-term market sentiment shifts, not short-term trading .

36. Chapter 1 - Foundations of Cycle Theory Next Section 9 – Cycle Analysis Presented By : This Content is Copyright Reserved Rights Copyright 2025@PTAIndia