Total Odd Lot Short Ratio: the ratio of odd-lot short sales to a ten-day moving average of total odd-lot purchases and sales. Floor traders short sales as a percentage of total short sales. (F1 is variable up to July 1964, F2 is August 1964-1972)16

Price earninqs ratio of Standard and Poors 500 index using most recent 12 months earnings and current price. Barrons confidence index: Ratio of yields on 10 high-grade bonds to yield on 40 bonds.

Specialist short sales as a percentage of total short sales.

Secondary stock sales as percentage of total stock sales. Mutual fund cash position as percentage of total assets of funds

for sample of funds. 90-day treasury bill rate.

percentage change (one month) in money supply (narrowly defined). percentage change (one month) in consumer price index.

AWIn August 1964 the NYSE changed the rules making floor trading much more restrictive. The most important change required that floor trades must be stabilizing; that is, purchase must occur when the stock is declining or sales when the stock is rising. For this reason the floor trade data pre-August 1964 must be handled differently from later data.

T = F =

mood

variables

informed S = opinion variables Sc=

Potential M

demand

variable

economic policy M= variables

(1) = а + ЬТ = cl Fl + c2 F2 + dE + fC + gS + h Sc + iM + kR + m M + nl

Thus the model to be tested is: for j = 1, 3, 6, 9, and 12.

Coefficients are expected to have the following signs: b>0; cl>0; cO; d<0; f>0

g<0; h<0; k>0; m>0; n<0

III. Results

Fitting equation 1 to the data produced Table 1. Dropping the insignificant variables (using a 90% confidence level) produces the results of Table 2.

It is useful at this point to interpret and compare these results. Among the mood variables the confidence index is by far the most successful and is significant for each adjustment period. The TOLSR has the expected sign for each adjustment period but is only significant for the six- and nine-month periods. The floor trading variables fail to be significant for any adjustment period while having inconsistent signs in the shorter periods. The PE ratio variable is significant only for the longest (12-month) adjustment period. This is not particularly surprising, since one would expect that it would take time for any reversal from a very low PE to occur . a low PE ratio may well decline even lower before reversing field. This is indicated by the incorrect signs on the one-, three-, and six-month adjustment periods. It should be noted that the other three mood variables (T, F, and C) are all attempts to gauge investor sentiment and thus tend to overlap. While the confidence index works best, the other variables tend to work when it is excluded. For example, the floor trading variables turn significant with the correct signs when the confidence index is dropped from the regression.

Between the two informed opinion variables, specialist short selling performs best since it has the expected sign and is significant for each adjustment period. Secondary distributions are only useful for the intermediate term three- and six-month periods.

Mutual fund cash is quite successful having the correct sign with a significant coefficient for each adjustment period. This suggests that the potential demand represented by institutional liquidity is a useful index of price movements .

Regarding the economic policy variables, the bill rate and percentage change in the CPI work well while the percentage change in the money supply does

REGRESSION RESULTS FOR EQUATION (1) WITH VARIABLES INCLUDED 1960-74

Variable

intercept

1-month 3-month 6-month 9-month

-0.076 (-0.6)

-0.149 (-0.85)

-0.378 (-1.62)

-0.440 (-1.56)

TOLSR

0.859 (1.03)

0.530 (0.46)

3.284 (2.08)

3.374 (1.76)

FLR TRAD SHT S

-0.183 (-1.57)

-0.192 (-1.19)

-0.030 (-0.14)

0.188 (-.72)

mood variable

FLR TRAD 64 ON

-0.074 (-1.18)

0.055 (-.64)

0.152 (1.3)

0.171 (1.18)

S & P 500 P/E

0.0005 (1.04)

0.0008 (1.29)

0.002 (1.66)

-0.0008 (-0.65)

CONFIDENCE

0.001 (1.11)

.003 (2.22)

.006 (2.81)

0.008 (3.36)

SPEC SHT SALES

informed opinion variable

-0.103 (-1.38)

-0.062

SECONDARY/NYSE V (-0.45)

-0.287 (-2.77)

-0.506 (-2.64)

-0.337 (-2.47)

-0.619 (-2.43)

-0.317 (-1.92)

-0.299 (-0.97)

potential

demand variable

MF CASH/ASSETS

BILLRATE

0.944 (2.8)

-0.012 (-2.5)

2.561 (5.48)

-0.045 (-6.78)

3.723 (4.96)

-0.068 (-6.86)

4.554 (4.72)

-0.088 (-7.13)

economic

policy variable

% CHG Ml

% CHG CPI

0.663 (0.59)

-2.887 (-1.68)

0.078

Durbin-Watson Stat.2.38 D.F. 166

0.701 (0.45)

-3.955 (-1.66)

0.364

1.05

-1.499 (-0.73)

-5.259 (-1.66)

0.464

0.899

-3.070 (-1.23)

-6.321 (-1.64)

0.466

0.567