There seems to be a consensus among academics, based on work done on the U.S. stock market, that investor sentiment is a good long-term forward reverse-indicator for stock markets. Which makes intuitive sense. Maximum-bullish is often a very good time to bring chips in; maximum bearish usually a good time to get them back on the table.
A study earlier this year though appeared to demonstrate that China’s stock markets were different. There, it seemed, investor sentiment was acting as a reliable predictor of future stock market performance. So what’s going on?
The paper highlighted today takes another look at the earlier work on Chinese stocks and runs the tests again on a bigger sample and excludes the extraordinary boom-bust period from 2006~2008. Muhammad A. Cheema, Yimei Man, and Kenneth R. Szulczyk from the universities of Waikato (New Zealand) and Utara Malaysia find no relationship in their work between investor sentiment and latter market moves.
The very big moves in 2006~2008 make it look as if there’s predictive power in investor sentiment but really all that’s going was the trends, both up and down, were so big it makes it seem like investors were savants when they were actually just trend-is-your-friend investing.
Useful work for this time of year when thoughts are turning to 2018 prospects. Stock markets around the world, it feels to me at least, have been dragged rather than propelled to current levels. Curmudgeonly investors seem to have been prepared to acknowledge higher earnings but remain reluctant to pay much more for the possibility the trend continues.
This is especially true in China where the Shanghai Stock Exchange Composite Index managed a mere 7% gain in 2017, trailing a dismal fourth place to the world’s other major stock markets in Japan, the U.S. and the U.K up 17%, 19% and 8% respectively.
Scope then for more progress to the upside? I believe so; at least until today’s curmudgeons convert to tomorrow’s confident operators.
The paper is a very digestible 8-pages and can be accessed via the following link Is Investor Sentiment a Reliable Predictor in China?
Happy Sunday.