Sentiment analysis shows how investors feel about current market conditions. Discover how you can use sentiment analysis to diversify your portfolio and hedge against inflation.

You can access many ways to analyze investments, such as looking at financial statements, calculating financial ratios like the P/E ratio and using technical analysis, which refers to following chart patterns.

One area investors often overlook is sentiment analysis, which reveals how investors feel about the current market environment.

Sentiment analysis can help you diversify your portfolio and hedge inflation, especially since some sentiment exchange-traded funds (ETFs) like the Relative Sentiment Tactical Allocation ETF (NYSEARCA: MOOD) automatically invest in hard assets like gold.

Sentiment Indicators

Sentiment indicators are the main tools that can show you if investors feel positively or negatively about a specific investment or sector.

Some of the most common ones include:

Put/call ratio: 

When investors buy put options, they feel less optimistic about the investment or sector. Buying call options shows that investors believe that the price will rise. Higher put/call ratios mean that investors have a negative outlook, while lower ones are a bullish signal.

CBOE Volatility index: 

The VIX also factors in put options being bought and looks at expected price fluctuations in the S&P 500 Index options over the next 30 days in real time. Like a high put/call ratio, a rising VIX means that investors feel more negative about the market.

Commitments of Traders Report: 

The Commitment of Traders (COT) report is a weekly publication that shows the aggregate holdings of different participants in the U.S. futures market. This publication shows how many long, short and spread positions make up the open interest. More long positions are optimistic signs, while short positions convey negative sentiment.

Relative Sentiment Tactical Allocation ETF

The Relative Sentiment Tactical Allocation ETF invests in other ETFs that invest in equities, bonds and gold.

It can shift the amounts allocated to these asset classes based on the average of four sentiment indicators including the Commitments of Traders Report. Each indicator receives a grade from 0 (extremely bearish) to 100 (extremely bullish), which is used to determine the equity position of the fund.

After determining the equity percentage, it allocates the remaining amounts among gold, bonds and inflation-protected bonds. This ETF makes investing easier since it can rebalance or shift allocations to different investment classes based on these ratings.