New risk index shows investors are trending toward higher greed

The Acertus Market Sentiment Indicator level is 61, which is trending toward high complacency with investors, said John Longo, chief investment officer of Acertus Capital Management, which launched the AMSI earlier this month.

At times of high complacency, or taking on more risk, the subsequent returns tend to be lower and vice versa when there is more fear or anxiety in the markets, Mr. Longo said.

“That could be where we are swinging right now,” Mr. Longo said in a telephone interview. The current level is “in the 70th percentile. That generally tells you people are not worried about risk, which means it's time to be cautious.”

AMSI provides another way for investors to measure and track investor sentiment in the equity markets, said Mr. Longo, who co-wrote a white paper on AMSI. It uses a scale of zero (extreme fear) to 100 (greed or high complacency) incorporating five variables — price/earnings ratio, price momentum, realized volatility, high-yield bond returns and the TED spread, which is the difference between three-month LIBOR and three-month T-bill interest rates. P/E ratio and price momentum have the highest weightings and TED spread, lowest.

Mr. Longo said the index is a “more robust sentiment indicator” for investors to look at when deciding to increase or decrease risk, and it can help investors avoid buying high and selling low.

AMSI tracks back to 1986 with higher readings prior to bubbles or economic downturns. The index reached an all-time low of 1.4 on Nov. 30, 2008, which signified a good time to start investing in the equity markets.

“The rare circumstances of 80 or more, or less than 20, shows greed and fear (respectively) are at high levels,” Mr. Longo said.

The index is supposed to a more robust version of other indicators, such as the Chicago Board Options Exchange Volatility index, commonly known as the VIX, and the put-call ratio, and is another tool at the disposal of investors. It will be updated on a monthly basis.