This article investigates the predictive power of popular market-based sentiment measures for subsequent returns on the Standard & Poor's (S&P) 500 futures contract over 10-day, 20-day, and 30-day horizons from January 1989 through June 1999. These measures include the volatility index, the put-call ratio, and the trading index. The empirical results show that these variables over a variety of specifications frequently have statistically and economically significant forecasting power. The results indicate that these variables are contrarian indicators, consistent with the view that periods of extreme fear in the stock market have provided excellent buying opportunities. Finally, out-of-sample trading simulations performed over the second half of the sample period demonstrate that profits and risk-adjusted profits would have been enhanced by buying S&P futures when the fear indicators were high rather than low. ᭧

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This paper shows that the spread between the 3-month Treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime, but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime, respectively. These findings suggest that Treasury bill rates forecast future federal funds rates most accurately when the Federal Reserve follows a well-defined rule that does not smooth the impact of shocks on the federal funds rate. an anonymous referee, and the editor for helpful comments, Robert Cumby and John Huizinga for making their software available to me, and Peter Nagan for survey data. The views expressed here are those of the author and do not necessarily reflect the views of the Federal Reserve Board or any other members of its staff. Any errors are my own. 1 As pointed out by a referee, a third possibility is that bill rates may be unbiased but not very powerful predictors of the level of future federal funds rates. 2 Melton and Roley (1988) show that the standard deviation of weekly percentage changes in the federal funds rate increased about four times during the nonborrowed reserves period from October 567

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