SushilBollinger Bands provide so many utilities in figuring out different aspects of the market. I discovered one few years ago and find it pretty useful in getting the broad sense of the fear and greed state of the market. You can try it as follows:

((Next Expiry Futures - Current Expiry) / Current Expiry) X No. of contract rollovers in a year X 100 is the underlying variable you want to calculate and then throw around Bollinger Bands over its ongoing plot. I use the upper standard deviation at +2 and the lower one at -3 standard deviations.

This variable basically plots a cost of carry / yield equivalent of the futures contract differential on a rolling basis. The reason I do not use Current Expiry - Cash is that at expirations there would be huge noise as well as one would have to multiply the ratio by the No. of times the current contracts could rollover found by dividing 365 days by days left to expiry. A bit cumbersome. Also, Cash and futures comparison requires finding out dividend declarations, dates of ex-dividends for various index components. So the formula I have chosen is simpler, easier to build (you can use the CIX function on Bloomberg to build this for example in a minute).

As the reading gets closer to the upper standard deviation line it is a fair indication of the long risk taking capacity exhaustion in the current state & as it slips closer to the lower (deeper) standard deviation line it is the extreme of risk aversion. The %B indicator of Mr. Bollinger provides additional qualifier often. Whenever there is a divergence between the main indicator and %B that is the indicator makes a higher high or a lower low while %B did not it becomes an even securer reading. Trade entry decisions made with other tools thus come with a greater confidence as to whether one is trying venturing into a turning tide or into a running tide.

A perspective of observing the market through such a lens provides to my own psychology a more positive frame of mind. Someone who aspires to consistently be paid by the market can take the attitude of providing some utility and service to the market for which it should be compensated regularly. When the market is at +2 line indicating a state of avarice you supply to the stretched out demand and when the market is at the -3 line indicating a state of panic you demand courage. That way an attitude of being a consistent service provider looking for consistent rewards helps one overcome one's own emotions of fear and greed that cold otherwise arise much more easily with a sense of competition with the system. I find, for myself, that an attitude to serve the emotionally unintelligent is the reason for them to pay me consistently.

John Bollinger adds:

There is a little-used method of calculating a constant-maturity futures contract that constantly looks n days into the future that is sometimes called a perpetual contract. Comparing two of these perpetual contracts with differing look forward lengths, say 10 and 30, would be quite helpful for Sushil's type of analysis.





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