How to interpret ISE Sentiment Index (ISEE)

Technically speaking, investors buy call options to anticipate the rise of underlying stocks or indices. Likewise, investors buy put options to gain profit when the price drops.  Basically, the ISEE reading just tells us the bullish bets against bearish bets.  Thus, the interpretation of the ISEE index is pretty straightforward. 

When the ISEE reaches around 100 which is trend line, the sentiment is treated as neutral status.  When the ISEE is above 100, for example 150, it means for every 100 units of put option orders are there are placed, and 150 units of call option orders are placed during the same time frame.  This case shows that investors are optimistic about the market.  The higher the ISEE reading, the more bullish the market sentiment is deemed to be. Conversely, measures below 100 signal pessimistic views from the retail investors.

The following chart shows that the ISEE drifted down from March 2013 and swung around the flat line 100. Even this chart shows a lot of noise, but you can still see that if the market reached a high, the ISEE tended to capture the pace. Likewise, when the market pulled back, the ISEE revealed this pattern as well.  There appeared a few spikes once a while.

                                  S&P 500 vs. ISEE from 1/2/2013 to 6/14/2013.

              If you want to know more about ISEE, you can read the following article:

http://top5indicators.blogspot.com/2013/09/how-to-avoid-herd-moves-in-stock-market.html

Credited to: http://www.investopedia.com/terms/i/iseesentiment.asp

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