Investor Sentiment and Stock Returns

Abstract

The author investigates the predictive power of investment newsletters and concludes that writers of investment newsletters do not seem to have any statistically significant ability, as a group, to forecast stock returns. Using statistical tools, the article shows that there is no discernable relationship between the forecasts made by newsletter writers as a group and stock market returns over four, twenty-six, or even fifty-two weeks. Statman then considers the questions of what makes forecasters turn bullish or bearish. He finds that they typically tend to “follow the tape” in the short term, but concludes that strong medium – to longer-term returns will lead forecasters both to become more bullish and to start anticipating some correction. Statman finally looks into the impact of more volatility on the propensity of forecasters to become more or less bullish, and concludes that high volatility does scare newsletter writers into bearishness.