Love-Panic Sentiment (Feb. 2016)
Love panic is a sentiment indicator created by BNP and gives an idea if the equity market is in a phase that is either love, neutral, and panic. This is a contrarian indicator so a high reading would be considered too much love which can signal a market high.
Love panic is actually a sentiment indicator created by BNP and can therefore be a useful addition to risk management tools. Gerry Fowler, who is Global Head of Equity & Derivative Strategy for BNP Paribas, notes that many entities have approached creating a sentiment indicator and that these usually focus on the equity market. These indicators are nice, but usually do not tell an investor what to do.
But here, the Love-Panic is constructed through various indices (that are subjectively related to sentiment) with 3-yr z-scores negatively correlated to 6-month forward equity returns! In other words: The Love-Panic indicator has an inverse correlation with six month forward equity returns.
The BNP Love-Panic indicator uses twelve factors including the small cap outperformance of large cap stocks, the CBOE put/call ratio, fund flow in to US equities, and State Street Investor Confidence. The result is a contrarian indicator so a high reading would be considered too much love which can signal a market high. Updated data is available each Monday on Bloomberg terminals. There are actually three versions – US markets (ILUVUS), European market (ILUVEUR) and Emerging Markets (ILUVEM).
Love-Panic is constructed through various indices (that are subjectively related to sentiment) with 3-yr z-scores negatively correlated to 6-month forward equity returns!
Each of the individual factor a individually weighted and vary frm 0-11% of the total index calculation:
Factors for the Love-Panic US include (following a testing period 2006 to May 2010):
Flow into high growth equities
US Fundflows into Global and International Equities
Positione of commercial traders on US indices
Small Caps outperformance over large caps
AAII bullish less bearisch %
Commodity composite bullish index
CBOE VIX Index
CBOE Put/Call Ratios
NYSE short interest ratio
State Street Investor Confidence
ISE Sentiment Index
Nasdaq to NYSE Monthly Trading Volume
Sentix Expectation to S&P 500
AA7 - 10Y ($) - Redemption Yield
Fund flow into equities
US Economic Surprise Indicator
On the other side, for the Love-Panic EU further specific indicators are added - here some selected positions:
IFO Business Expectations
IFO Current Assessment
Eurozone composite PMI
Economic Surprise Indicator Europe
Economic Surprise Indicator UK
ECB Main Refinancing Rate
Fund Flow into European equities
EC Economic SentiMent Indicator Eurozone
EC Manufacturing Confidence
"Manual"/Recap (in German: Gebrauchsanleitung):