Make Money with Roubini Sentiment Indicator

I started doing this as a joke and did not expect to find a way to make money with Roubini Sentiment Indicator. Nouriel Roubini, a.k.a Dr. Doom has recently been stating that he is not Dr. Doom but he is Dr. Realist despite the fact that he is on TV mostly when things are going wrong, volatility spiking and stock market going down. You can clearly see this pattern from the graph below.

Roubini Sentiment Index vs. SPY provided by insidermonkey

I gathered the Roubini sentiment index from weekly values provided by Google Trends. A simple correlation analysis shows that Roubini sentiment index has a negative correlation of (0.68) with the market and a positive correlation of 0.82 with the VIX. Some might dismiss the Roubini sentiment indicator because of its high correlation with the VIX, thinking that Roubini’s popularity is caused by the increase in VIX. Before jumping into any conclusions, we need to answer the following question: What is the exact nature of the relationship between VIX and Roubini Sentiment Indicator? If VIX is leading Roubini Sentiment Indicator, then you could rightly claim that Roubini is merely a parasite exploiting the increased fear in the marketplace. If the two indices are coinciding then Roubini is merely expressing what the market is thinking, hence he is truly the Dr. Realist or maybe Dr. Journalist? On the other hand, if Roubini Sentiment Indicator is leading the VIX, then it might be the case that Roubini is spreading the fear like the plague and causing the spikes in VIX and declines in the market. In this case, he is the dreaded Dr. Doom. Take a look at the graph of Roubini Index vs. VIX and see the high correlation yourself.

Roubini Sentiment Index vs VIX provided by insidermonkey

How do we test our hypothesis about VIX and Dr. Doom, I mean Roubini? Granger Causality Test is the perfect tool for this job. We use VIX as the dependent variable and lagged values of VIX and lagged values of Roubini index as independent variables. So the idea is if lagged values of Roubini index can explain the movements in VIX in the presence of lagged values of VIX, then we can say that Roubini index is Granger causing the VIX (we run some other tests to make this claim, I don’t want to bore you with the technical details). We also test whether VIX Granger causes the Roubini index. Our test results clearly show that Roubini Sentiment Indicator Granger causes the VIX up to two weeks in advance with a very high degree of statistical significance. Naturally VIX does not Granger cause Roubini index. Roubini is indeed the Dr. Doom and maybe he should be put away for the sake of our economic recovery and millions of unemployed workers.

Maybe not. Since Roubini index is a leading indicator of an imminent spike in VIX and usually spikes in VIX come with a decline in stock market, we can develop a profitable trading strategy around this finding. Hey, I have a full-time job and did this quickly for fun, so the strategy I will present now may not be refined enough. However, it is good enough for a modest blog post. Here is our simple trading strategy: Go long the VIX when Roubini Sentiment Index goes %25 above its four-week moving average. Following this strategy over the 2007-2010 period will earn us a weekly average return of an amazing 2.4% (If we had simply gone long VIX at all times, the average weekly return would have been 1.6%). If we hold on to our long VIX position for three weeks, the average return over this time period is 8.25%. Dr. Doom has been sitting on a huge pile of gold all this time, yet he does not trade (Would it be insider trading if he traded based on what he is going to say on TV the next day?). Google guys could also utilize Roubini index in real-time and trade profitably :)

Another trading strategy is shorting the SPY when Roubini Sentiment Index is 25% above its 4-week average. In this strategy when we keep our short position for three weeks, SPY declines an average of (1.6)% over three weeks. Normally the average weekly decline in SPY is only (.06)% from Jan-2007 to Aug-2010. It is really interesting that we can make money by using Roubini Sentiment Indicator.

What does the Roubini Sentiment Indicator tell us lately? The latest value for Roubini Index is 2.2 and it is more than 25% above its 4-week average. The latest reading was from Aug 22nd. So this means that the stock market is expected to decline by an average of 1.6% between Aug 22nd and Sep 12th. Of course stock market losses would be much higher if Roubini shows up on CNBC tomorrow and scares the bejesus out of investors :)

Disguised Advertising: This article is brought to you by insidermonkey, which is going to be your source for free real-time insider trading data. At least, we hope so. We also aim to educate ordinary investors and give them the tools to help them make informed decision. Again, we hope so. Come back in a few days, and I will present another interesting and entertaining article. Btw, I have a Ph.D. in financial economics with a focus in insider trading. Maybe you will come back for serious articles on insider trading.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 9 Most Dangerous Countries for Tourists to Visit

Reign of Terror: The 10 Most Ruthless Politicians in History

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!