How would you define market sentiment?

 

What is Market Sentiment?

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

KEY TAKEAWAYS

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

Understanding Market Sentiment

Market sentiment, also called "investor sentiment," is not always based on fundamentals. Day traders and technical analysts rely on market sentiment, as it influences the technical indicators they utilize to measure and profit from short-term price movements often caused by investor attitudes toward a security. Market sentiment 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 would sell.

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

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