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Chris Helgren/Reuters

Asking investors how they feel about stocks is a decent way to get a look at market sentiment, as they navigate rallies, downturns, political uncertainty and monetary policy.

But Toronto-Dominion Bank has taken sentiment readings a step further with its newly launched TD Direct Investing Index: Rather than based on questions, it offers a monthly snapshot based on the bank’s extensive retail trading data.

“The unique piece here is that it is based on actual investor activity from Canada’s largest self-directed platform,” Ted Paris, vice-president of direct investing at TD, said in an interview.

The index arrives at an interesting juncture for the stock market.

Gone are the pessimistic lows that followed the severe sell-off in early 2020, when North American lockdowns threatened the economy and corporate profits. Gone, too, are the euphoric highs as the stock market swung back to health by mid-2020, amid tremendous government and central-bank stimulus.

As of August, which is the most recent monthly reading available, the index showed investors are now only slightly bullish. While the backdrop consists of upbeat numbers on employment, profit growth and economic activity, central banks are pondering tighter monetary policy that may be contributing to recent volatility.

“It is not a forecast. It is recent history,” Mr. Paris said.

The AAII Investor Sentiment Survey from the American Association of Individual Investors, a U.S. survey that dates back to 1987, has been embraced by a number of Wall Street professionals looking to gauge whether small investors have grown overly optimistic or pessimistic.

That’s because retail investors can be prone to poor market timing, buying at the top and selling at the bottom.

But Mr. Paris doesn’t expect the TD Direct Investing Index will be used by sophisticated investors looking for contrarian indicators.

“It is not intending to tell somebody, based on the sentiment last month, that this is the stance or position that they should take,” he said.

Rather, he sees the index as one more tool to help retail investors make decisions, especially younger investors who have been entering the market in recent years and may be wondering what other investors are doing.

The index reflects overall sentiment by digging into whether investors are buying stocks on upswings or dips, and whether they are chasing trends or retreating into safer holdings – using, of course, TD’s online brokerage data.

But the index also reveals the most popular securities bought, sold and held during the month – all of which can be filtered according to investor age, region and investing style – offering a potential wealth of insights into what is making the market tick.

For example, while investors were keen to chase meme stocks such as AMC Entertainment Holdings Inc. in August, they held onto some of the bluest of blue-chips stocks, including TD, Enbridge Inc., Apple Inc. and Suncor Energy Inc.

The index even breaks down the changes in asset allocation, revealing whether investors are favouring Canadian stocks over U.S. and international stocks, and whether they are increasing or decreasing their cash levels.

Can the index make you a better investor? It will likely make you a better informed investor, since you’ll gain a greater understanding into what everyone else is doing. And if you like to buy stocks when other investors are fearful – or sell when others are greedy – the index could become a helpful guide.

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