Market sentiment is the collective attitude of traders, investors and other participants in the financial market. Market sentiment tells you how a group of traders and investors feels about the market. Market sentiment is also known as investor sentiment.
We have two types of market sentiment in the financial market: bullish and bearish.
Bullish means most of the market participants are expecting the market to go up in the near term. Obviously nothing trends in the same direction forever. If you can foresee the future trend, then it will be easier to pinpoint when the trend will turn.
When market sentiment is bullish, most of the stocks will be in uptrend and seems like it will continue in that direction.
If the overall market sentiment is bearish, then most of the stocks will be trending down and it will continue in that direction.
Market sentiment generally refers to the overall attitude of investors towards a particular financial security or the overall financial market. This principle works in all types of market such as forex, stock, commodity, futures and options.
Short-term investors, Intra-day, Swing and positional traders always try to understand the overall market sentiment before thinking about a trade. A trader following the overall trend of the market is known as trend following or momentum trader.
Long term value investors are mostly not concerned about the market sentiment. They prefer to pick stocks based on value investing methods. World renowned value investor Warren Buffet said that “it is better to be fearful when others are greedy and greedy when others are fearful”.
How to measure market sentiment?
Market sentiment drives supply and demand dynamics of stocks and the financial market as a whole.
Depending on how supply and demand dynamics works, prices either move up or down.
Traders and short-term investors use market sentiment indicators along with other technical tools in order to refine entry and exit signals.
Here are most important indicators that traders and investors use along with other technical and fundamental indicators to understand the market sentiment.
- VIX: Volatility Index (VIX) is a measurement to tell you expected volatility in the next 30 days time period. In India, we have India VIX. A value of 15 in India VIX means low volatility, while if it’s more than 35, then it indicates high volatility.
- Advance decline index: it basically tells you how many stocks in the market are moving up against how many are going down.
- High-low index: It measures how many stocks are making 52 weeks high versus how many are creating 52 week lows.
- Moving average: Some traders consider the 50-day moving average above the 200-day moving average as bullish market sentiment. If the 50-day moving average is below the 200-day moving average then it’s considered as a bearish market sentiment.
- Global Index: global market sentiment can be a factor to determine your own country’s market sentiment. Therefore many traders and investors prefer to watch global indices such as Dow Jones, S&P 500, Nasdaq, Dollar Index, FTSE 100, DAX, Shanghai Composite, FTSE China A50, Hang Seng, Nikkei 225 and Brent Crude oil.
- FII and DII data: Foreign institutional investors (FII) and Domestic Institutional investors (DII) net buy and sell data can easily tell you who is bullish and bearish on the market. You can get FII and DII data from NSE and BSE sites.
Study of market sentiment indicators can tell you how people are taking buying or selling decisions based on the current market or economic conditions.
Market Sentiment indicators are used in conjunction with other forms of technical analysis and fundamental analysis to understand key turning points.
