What is Relative Sentiment And How Does It Impact Your Portfolio?

Sentiment analysis shows how investors feel about current market conditions. Discover how you can use sentiment analysis to diversify your portfolio and hedge against inflation.

You can access many ways to analyze investments, such as looking at financial statements, calculating financial ratios like the P/E ratio and using technical analysis, which refers to following chart patterns.

One area investors often overlook is sentiment analysis, which reveals how investors feel about the current market environment. 

Sentiment analysis can help you diversify your portfolio and hedge inflation, especially since some sentiment exchange-traded funds (ETFs) like the Relative Sentiment Tactical Allocation ETF MOOD automatically invest in hard assets like gold.

Sentiment Indicators

Sentiment indicators are the main tools that can show you if investors feel positively or negatively about a specific investment or sector.

Some of the most common ones include:

Put/call ratio: 

When investors buy put options, they feel less optimistic about the investment or sector. Buying call options shows that investors believe that the price will rise. Higher put/call ratios mean that investors have a negative outlook, while lower ones are a bullish signal.

CBOE Volatility index: 

The VIX also factors in put options being bought and looks at expected price fluctuations in the S&P 500 Index options over the next 30 days in real time. Like a high put/call ratio, a rising VIX means that investors feel more negative about the market.

Commitments of Traders Report: 

The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market. This publication shows how many long, short and spread positions make up the open interest. More long positions are optimistic signs, while short positions convey negative sentiment.

Relative Sentiment Tactical Allocation ETF

The Relative Sentiment Tactical Allocation ETF invests in other ETFs that invest in equities, bonds and gold.

It can shift the amounts allocated to these asset classes based on the average of four sentiment indicators including the Commitments of Traders Report. Each indicator receives a grade from 0 (extremely bearish) to 100 (extremely bullish), which is used to determine the equity position of the fund. 

After determining the equity percentage, it allocates the remaining amounts among gold, bonds and inflation-protected bonds. This ETF makes investing easier since it can rebalance or shift allocations to different investment classes based on these ratings.

Alternative Investments

Using ETFs like the Relative Sentiment Tactical Allocation ETF can protect against inflation and let you gain exposure to hard assets automatically. While you don’t have to use all the indicators, knowing the basics can show you general market sentiment.

Some traders like to use these indicators in a contrarian manner, meaning to buy when everyone else is selling and vice versa. For example, about 80% of options aren’t exercised, meaning that most options traders fail to accurately predict investment trends. 

Contrarian investors know that bearish markets can reveal undervalued, high-growth opportunities, while average investors might panic. Having these tools in your back pocket can show you which sectors might be overvalued and others that might be trading at a discount with room to grow.

Looking for ways to boost your returns? Check out Benzinga's coverage on Alternative investments:

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• Art: Why Billionaires Like Jeff Bezos Invest Millions In Artwork And How Retail Investors Found A Way To Get In On The Action

Bottom Line

Fundamental and technical analysis are two broad ways to analyze investments. Some investors fail to account for sentiment indicators like put/call ratios, the VIX and the Commitments of Traders Report, which show if investors are feeling positive or negative about the markets. 

These tools and sentiment-based ETFs can help you diversify your portfolio and hedge against inflation as well.

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