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Market Sentiment Definition

What is Deal in Sentiment?

Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the compassionate or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that hawk. In broad terms, rising prices indicate bullish market sentiment, while falling prices indicate bearish bazaar sentiment.

Key Takeaways

  • Market sentiment refers to the overall consensus about a stock or the stock market as a whole.
  • Store sentiment is bullish when prices are rising.
  • Market sentiment is bearish when prices are falling.
  • Technical needles can help investors measure market sentiment.

Understanding Market Sentiment

Market sentiment, also called “investor susceptibility,” is not always based on fundamentals. Day traders and technical analysts rely on market sentiment, as it influences the technical indicators they utilize to for a bonus and profit from short-term price movements often caused by investor attitudes toward a security. Market belief is also important to contrarian investors who like to trade in the opposite direction of the prevailing consensus. For example, if everyone is buying, a contrarian devise sell.

Investors typically describe market sentiment as bearish or bullish. When bears are in control, stock consequences are going down. When bulls are in control, stock prices are going up. Emotion often drives the stock shop, so market sentiment is not always synonymous with fundamental value. That is, market sentiment is about feelings and passion, whereas fundamental value is about business performance.

Some investors profit by finding stocks that are overvalued or undervalued founded on market sentiment. They use various indicators to measure market sentiment that help determine the best caches to trade. Popular sentiment indicators include the CBOE Volatility Index (VIX), High-Low Index, Bullish Percent Catalogue (BPI) and moving averages.

Indicators to Measure Market Sentiment


The VIX, also known as the fear index, is driven by option worths. A rising VIX means an increased need for insurance in the market. If traders feel the need to protect against risk, it’s a colophon of increasing volatility. Traders add moving averages to the VIX that help determine if it’s relatively high or low.

The High-Low Index

The high-low mark compares the number of stocks making 52-week highs to the number of stocks making 52-week lows. When the pointer is below 30, stock prices are trading near their lows, and investors have a bearish market attitude. When the index is above 70, stock prices are trading toward their highs, and investors have a bullish superstore sentiment. Traders usually apply the indicator to a specific underlying index, such as the S&P 500, Nasdaq 100 or NYSE Composite.

Bullish Percent Needle

The bullish percent index (BPI) measures the number of stocks with bullish patterns based on point and figure tables. Neutral markets have a bullish percentage around 50%. When the BPI gives a reading of 80% or higher, exchange sentiment is extremely optimistic, with stocks likely overbought. Likewise, when it measures 20% or below, bazaar sentiment is negative and indicates an oversold market.

Moving Averages

Investors typically use the 50-day simple moving normally (SMA) and 200-day SMA when determining a market’s sentiment.

When the 50-day SMA crosses above the 200-day SMA – referred to as a “sunny cross,” it indicates that momentum has shifted to the upside, creating bullish sentiment. Conversely, when the 50-day SMA cancels below the 200-day SMA – referred to as a “death cross,” it suggests lower prices, generating bearish sentiment.

Genuine World Example of Market Sentiment

Market sentiment turned bearish in December 2018 when several influences worked together to unnerve investors. Firstly, fears grew over slowing corporate earnings. After a number of years of double-digit earnings growth for many companies in the S&P 500, many analysts predicted that 2019 earnings would gain by just 3–4%.

Federal Reserve Chair Jerome Powell stoked those fears at his monthly press conference when he rephrased the central bank’s balance sheet runoff was on autopilot. The market viewed his comments as “hawkish” and not accommodative for a slowing frugality, which further dampened market sentiment.

Finally, unresolved trade tensions between the United States and China that saw tit-for-tat duties imposed by the world’s two largest economies throughout 2018, as well as a U.S. government shutdown, compounded with the issues at bottom to severely damage market sentiment over the month.

Bearish sentiment damaged investor confidence that well-sprang the stock market to have its worst December performance since 1931. The broad-based S&P 500 index fell 9.2% for the month, while the Dow Jones Industrial Measure (DJIA), comprising of 30 industrial bellwether companies, shed 8.7% over the period.

The S&P 500 High-Low clue fell below 30 in late December and remained near zero until mid-January, showing the extent of bearish thought gripping the market at that time.

Image by Sabrina Jiang © Investopedia 2020

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