Sentiment Measure Using ETF Sector Correlations

By measuring and averaging intercorrelation between different assets, you can create a market sentiment indicator and add it in your trading arsenal.

The sentiment indicator you are about to download calculates the average intercorrelation between two or more securities. In mathematical terms, it takes a security, calculates the 10-bar correlation with other securities, performs the same steps for each security, takes the absolute values and finally averages the results.

In the reference link I included below, the author of this indicator uses four S&P sectors to build its sentiment measure. The sectors are: energy (XLE), financial (XLF), consumer discretionary (XLY) and technology (XLK).

Example:
a = InterCorr("XLE,XLF,XLY,XLK", 10); // Symbols are separated by a comma

Of course, you are not limited to these securities. You can add your own ticker symbols (Sectors, stocks, ETFs, Currency pairs...) and create a personalized market sentiment indicator. Besides, the correlation period (Number of past bar to use to calculate the correlation) can be changed as you can see in the above example.

Finally, I wanted to share with you a technique I found on QuantShare blog. You can use this technique to optimize securities passed to the "InterCorr" function and thus create a better market sentiment indicator. You can read more about this technique here:
http://www.quantshare.com/sa-291-select-the-best-etfs-combination-to-maximize-your-return-and-reduce-your-investment-risk

Reference:
http://seekingalpha.com/article/190070-market-sector-correlations-as-sentiment-measure

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