Sentiment and the Performance of Technical Indicators

Posted: 22 May 2019

See all articles by Shu Feng

Shu Feng

Boston University

Na Wang

Hofstra University - Frank G. Zarb School of Business

Edward J. Zychowicz

Hofstra University - Department of Finance

Date Written: June 15, 2016

Abstract

This paper studies the effectiveness of technical trading approaches in market environments of varying sentiment. Due to short-sale constraints, overpricing with high sentiment (i.e. relatively optimistic sentiment) is more prevalent compared to underpricing with low sentiment (i.e. relatively pessimistic sentiment) and this effect is stronger on difficult-to-arbitrage securities. The authors find consistent evidence over the period of 1993-2010 that the examined set of technical indicators perform better during periods of high sentiment than during periods of low sentiment. Moreover, this sentiment effect is relatively more pronounced for small stocks. These findings hold after a number of robustness checks are applied and highlight the importance of incorporating the sentiment effect when using technical indicators.

Keywords: Technical indicators, sentiment, mispricing, short-sale constraints, and difficult-to-arbitrage securities

JEL Classification: G02, G10, G17

Suggested Citation

Feng, Shu and Wang, Na and Zychowicz, Edward J., Sentiment and the Performance of Technical Indicators (June 15, 2016). Journal of Portfolio Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2140230 or http://dx.doi.org/10.2139/ssrn.2140230

Shu Feng

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Na Wang (Contact Author)

Hofstra University - Frank G. Zarb School of Business ( email )

134 Hofstra University
Hempstead, NY 11549
United States

Edward J. Zychowicz

Hofstra University - Department of Finance ( email )

Hempstead, NY 11550
United States

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