A Full Year of Panic ? (I don’t think so)

Ever have a minor annoyance kinda hang around, not go away, like a pebble in your shoe? A pet peeve that finally reaches the point where you have to say or do something?

That’s how I feel about the Citibank Panic/Euphoria model. Recall we first looked at his last May 2005. (Disclosure: I have Citibank Smith Barney accounts)

In its literature, Citi claims:

"Citigroup equity strategists’ proprietary measure of investor sentiment – the Panic/ Euphoria Ratio – is currently firmly in the “panic” zone, indicating weak sentiment. Historically, this has been a reliable contrarian indicator of stock market performance. They believe that recovering investor sentiment may drive continued global equity market gains over the coming six months."

Let’s see if you can identify what the problem might be: 


The issue that continues to annoy me about this is the so called panic level of Market Sentiment.

You see, Panic is a momentary phenomenon, a product of fear and adrenaline. Its what kept your ancestors from getting consumed by sabre tooth tigers. It is also what makes people reliably sell at market bottoms.

Panic is transitory.

So please explain to me how, according to the chart above, we have been at Panic levels for about a year now?

For the above chart to have any value beyond being a marketing device (hey, it does run every week in Barron’s), it either needs to be relabled (i.e., Discomfort/Pleasure indicator), or the Panic "level" needs to be adjusted down to 0.6 or so.

That is all . . .


Global Markets Perspective
November/ December 2005

What Happened to All the Easy Trades? — Part II
Mike Santoli
Barron’s MONDAY, FEBRUARY 6, 2006   

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What's been said:

Discussions found on the web:
  1. Jay Morrison commented on Feb 4

    ‘Bout time someone sheds light on this non-indicator… Doesn’t Santoli have enough clout at the WSJ to choose the metrics that he would prefer to focus on?

  2. Josh commented on Feb 4

    I can’t believe someone as musically inclined as you wrote the above article without a single reference to Widespread Panic.

  3. piggington commented on Feb 4

    Not to mention that 2005 saw: the VIX bouncing around the low teens, pervasively bullish stock market sentiment, and risk premia that even Uncle Al thought were too low…

    I agree with you that “panic” can’t last for a year… but even if it could, 2005 wasn’t that year! I wonder what exactly their “proprietary” measure is indicating…

  4. Anonymous commented on Feb 4

    According to the chart, panic is definitely a long-term affair. And since they use a “proprietary” method who knows what it means. For all we know, they’re measuring the ratio of toilet paper sales to hot dogs.

  5. pjfny commented on Feb 4

    IF this is “panic”, when the mkt is trading close to highs and the vix close to lows, bullish/bearish sentiment 3/1, credit spreads at its low, emerging mkt spreads at low end, I would love to hear what they call the panic that ensues ,when the mkt realizes that we are going into a recession (the mkt seems to think that greenspan has abolished recessions forever- LOL). This recession or the anticipation of it ( timing uncertain) will be charactarized by widening credit spreads, flight to quality and high volume selling of equities.
    We will have to call that panic a mega/super panic.

  6. scorpio commented on Feb 4

    agree, call it something other than “panic”, but at -0.6 does look like it called the two buying opportunities in ’05 of April and Oct

  7. John Navin commented on Feb 4

    This has been bugging me for months. I’ll bet someone with advanced mathematics and various statistics degrees came up with this.


  8. muckdog commented on Feb 4

    I know there are some Booyah Bulls out there, but there is also this underlying theme of pessimism that seems to be around individual investors. Nobody likes the President; and he’s spying on folks. There is corruption in Congress and the Senate. The Right Wing took over the Court without a fight. Nobody wants to fight the war anymore, and Iran is on the horizon as the next war. Energy bills have gone up, so folks have cut back spending on other things over the winter. Adjustable rate financing has taken money out of pocketbooks, so that’s more money folks can’t spend.

    There’s your fear. There’s your “panic.” Things seem dire, outside of an hourlong CNBC show of shouts and touts.

    The market has been basically flat for a long time now, which actually has allowed earnings to catch up with valuations and could lead to a strong rally should investors feel good about themselves again.

    And after friday’s fears that wage pressures will keep the Fed hiking rates, imagine what would happen to stocks if Bernanke indicated otherwise?

  9. Idaho_Spud commented on Feb 5

    “Panic” might be too strong a term… how about “Cliff of worry”? Maybe I should trademark that one for the coming year.

  10. rwbil commented on Feb 5

    Looking at the chart over the last year it does indeed seem to be a less than useful indicator, though it did predict some short term market lows. I am guessing that the indicator is set to indentfy major emotional extremes. My question would be what did the indicator show during the tech bubble. If it was in panic mode then, I would say throw out the chart. Also, it would be nice to see what the chart showed before and after the ’87 crash.

    One last thought doesthe chart come with a buy sell recommendation. Maybe only buy during extreme pessimism such as below 0.3

  11. Bill commented on Feb 5

    there is a better indicator on sentiment — that is the 25 day m.a. of the CBOE Total (Equity and Inidices) Put/Call Ratio — Dick McCabe of Merrill ( now retired)has used it with solid results — if the 25 day average is above .80, that would be a bullish read — data is available on the CBOE website —

  12. B commented on Feb 5

    Didn’t C cut their entire technical analysis team? Now TA is just a means to an end and is not the end all but there is significant validity to it. Especially alot of advanced work not shared with the public. ie, No TA would show the entire year in a panicked state. My cortisol levels are starting to elevate just looking at that.

    So, this is likely the work of some economist who uses fundamental analysis gibberish. Not that all fundamental analysis is gibberish. It’s just that all economists spout nothing but gibberish and they use fundamental analysis exclusively. ie, Economists are the creme de la creme of gibberers. Enough of my own prattling. I’d suspect it’s an economically based slow motion indicator. I’d wonder if it isn’t the UM Consumer Sentiment number which has tended to lean towards crappy for some time…Think they have back tested it? LOL. To be fair, it does seem to have hit lows during the two lows of 05. They need to adjust the Y axis or you’d have loaded up at the peaks and troughs thus making 05 a year of zero gains except for oil and commodities related investments. ie, It sure looks pretty but you didn’t make any money investing with it.

    There is a general feeling of uneasyness within the working population. I’ve tried to rationalize this myself. In the end I don’t think it has anything to do with market sentiment. It’s misery. It is the 1970s revisited. Loss of confidence in government, fear of foreign competition, America’s pre-eminence is threatened, high commodity costs, a stock market malaise, loss of good jobs, the peak of the cold war and on and on. Didn’t help the markets then. But, there is a general bullishness right now by market professionals, investors , advisors and stock market activity. It is a palpable bullishness.

    My concern is that this bullishness has turned to bearishness very quickly over the last few years. Too much memory reflex going on with the bubble. So, the market has tended towards a range rather than resetting enough to launch any type of rally that is significant. Will 06 be the same way?

  13. calmo commented on Feb 5

    Ok, I think I see the flaw in the education, the picture (and this could be on account of being charmed out of my socks by muckdog’s Feb 4 post), the continuing heuristic employed by Barren’s ( you spell it your way then).
    The Widespread Panic has been mis-named (just look at the way some people name Barren’s) as Barry more than suggests with his saber tooth tigers.
    This is no panic, people: as muckdog illustrates so clearly, this is The Stink.
    And that is what has kept us alive (for more than the past few years too), that and those sensitive noses that prefer better smelling meat.
    Speaking of fresh meat, money is made on the weekly (daily?) volatility of the market in the past few years, not (ex oil, gold and a few others) on these longer range profundity laden morsels that the tigers are laying out for us, no?

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