Index Jun09.jpg

Markets are driven by two factors, sentiment and fundamentals.

Fundamentals can be followed by analysing hard data. In chemical markets, for example, key areas include new housing starts, auto sales, industrial production, Asian exports, etc. This data can also be used to make forward projections.

However, sentiment is equally important, as it tells us what markets think is going to happen next. Sentiment can often contradict fundamentally-based forecasts. Usually it involves financial players, often using price charts to time their entry and departure.

Today, many markets are clearly being ruled by sentiment. In oil markets, for example, Deutsche Bank analysis suggests speculative involvement is back to levels seen last July, before the market crashed. So it is important to better understand how sentiment is changing.

Thus today, the blog is launching its new “Boom/Gloom Index©“, shown above. This is calculated using data from the Financial Times, showing the number of times the words “boom” or “gloom” appear in its columns each month. The FT has been chosen, rather than Google or a more general search mechanism, so as to best reflect sentiment in financial markets.

The Index (blue column) starts from July 2007, when the blog began. It peaked in October 2007, when US, UK and Chinese stock markets peaked. It then shows sentiment recovering in H1 2008, when commodity markets were very bullish. And since January it has been rising strongly, as oil and stock markets have been strengthening.

June’s figure is estimated from the first 10 days of the month. It shows we are now close to October 2007’s Boom levels. This is possibly a warning sign of at least a temporary peak. The chart also shows a potential cause of the rally in sentiment, namely the extraordinary rise in mentions of the phrase “green shoots“. This is shown on the right-hand scale, in green.

The blog welcomes your comments on the index, and will update it regularly, particularly when sentiment is a particularly powerful influence on markets.

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