Insider Monkey recently published a detailed article explaining how the Roubini Sentiment Index is a leading stock market indicator and can be utilized profitably in the stock market through shorting the SPY. The Roubini Sentiment Index shows Nouriel Roubini’s popularity in Google searches and in the 2007-2010 period, spikes in Roubini’s popularity were followed by an average 1.6% decline in the S&P 500 index in the following three-week periods. If jumps in Roubini’s popularity imply investors are becoming increasingly fearful, then large declines in Roubini’s popularity should imply that investors are becoming greedy (or less fearful). Our results show that’s indeed the case.
Whenever Roubini’s popularity falls below 80% of its 8-week moving average, the S&P 500 index increases by an average 1.5% during the following three weeks. This is during the 2007-2010 period, when the stock market declined an average of 0.12% during a random 3-week period. This indicator was also reliable 62% of the time.
Roubini has been appearing on TV less frequently for a while now, and his popularity has declined by 40% since it peaked on August 22nd (right around the time when everybody was pessimistic about the economy and stock market, and S&P 500 index was around 1050). Recent trends still support our hypothesis that Roubini’s popularity and the stock market are negatively correlated. Anyway, on Oct 10th, Roubini’s popularity declined below its 8 week moving average. This is a very bullish sign showing investors’ optimism about the stock market.
Recent results predict that the stock market will increase by an average of 1.5% in the next three week period.
This is a guest post by Insider Monkey.