Market sentiment, often termed as “investor sentiment,” represents the general feeling or mood of investors towards a specific security or the broader financial market. It encapsulates the collective attitude and emotional reactions of market participants, and isn’t always grounded in the asset’s fundamentals. Market sentiment can be broadly classified as bullish (positive) when prices are rising or bearish (negative) when prices are dropping.
- Bullish vs. bearish: When investors are optimistic, expecting prices to rise, the sentiment is deemed bullish. Conversely, when they anticipate declines, it’s termed bearish.
- Driven by emotion: Prices in financial markets can often be driven more by sentiment (emotions) rather than by fundamental values.
- Contrarian trading: Some investors adopt contrarian strategies, choosing to trade against prevailing market sentiments.
Measuring market sentiment
- VIX (Fear Index): A volatility index indicating the market’s expectation of 30-day volatility, derived from option prices. A rising VIX may signify increasing uncertainty or fear.
- High-Low Index: Contrasts the number of stocks hitting 52-week highs to those hitting 52-week lows. This indicates if stocks are trading near their highs or lows.
- Bullish Percent Index (BPI): Determines the percentage of stocks showing bullish trends based on point and figure charts.
- Moving averages: The crossing of the short-term moving average (like the 50-day SMA) over a long-term moving average (like the 200-day SMA) can indicate bullish or bearish sentiment.
- Susceptible to human emotions such as fear and greed.
- Can be influenced strongly by short-term news or events.
- Often doesn’t provide a comprehensive view of the market’s fundamental health.
Throughout 2022, fluctuating sentiments influenced stock market volatility, reminiscent of the 2008 Great Recession. Concerns over high inflation and rising interest rates led to a bearish sentiment, with many fearing a looming recession. However, as 2023 progressed, a shift towards bullish sentiment emerged as the fear of recession dwindled, reflecting in the S&P 500’s performance and the VIX’s decline. But these changes in sentiment can be temporary, with the underlying economic challenges potentially leading to future bearish views.
Market sentiment is a complex interplay of collective investor emotions and the perceived value of assets. While it can offer insights into short-term market movements, relying solely on sentiment can be risky due to its volatile and often irrational nature. Investors are advised to consider a combination of sentiment, technical analysis, and fundamentals when making decisions.