Tuesday, October 14, 2014

How Worried Are Investors About This Stock Market?

There are many ways of measuring investor and trader sentiment about the stock market:  put-call ratios, surveys, measures of breadth, etc.  One interesting measure is to see how actively people conduct searches on a topic via Google.  It turns out that a measure of worry about market related topics can be an effective predictor of prices.  Above, we see the chart for searches conducted on the topic of "bear market", as captured via Google Trends

Notice the spikes in searches beginning in January, 2008, before the worst of the bear market had taken hold.  We also see smaller spikes in August through October of 2011 and still smaller ones in April-June of 2013, and this month so far.  As the stock market has become less volatile since the GFC, we see lower volatility in the time series of searches for "bear market".  Note Google's extrapolation to forecast search activity for 2015:  it also remains tame.

While we have a blip higher in bear market searches, those are so far nowhere near as high as the searches in 2011 and certainly not as pervasive as in 2008.  Investors are not exactly complacent:  October's search level is 24--higher than any other month of 2014--and the month is only half over.  Still, the level of bearishness by this measure is consistent thus far with what would be seen in a bull market correction, not an outright bear market. 

Further Reading:  Equity Put-Call Ratio