Market sentiment 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. For example rising prices would indicate a bullish market sentiment, while falling prices would indicate a bearish market sentiment.
There are many different sentiment indicators in the market. Some of these include the CBOE Volatility Index (VIX), 52 week High/Low Sentiment Ratio, Bullish Percentage, 50-day moving average and 200-day moving average.
CBOE Volatility Index (VIX) – VIX is often referred to as the fear index. Based on option prices, VIX increases when investors buy put options to insure their portfolios against losses. A rising VIX indicates an increased need for insurance. By looking for spikes in the index, we can identify moments where fear has overwhelmed the market, giving us the opportunity to buy stocks at reduced levels.
HIGH/LOW SENTIMENT RATIO:
The high/Low sentiment indicator compares the number of stocks making 52-day highs to the number of stocks making 52-week lows. When stock prices are trading at their lows across the board, it means traders have a bearish market sentiment. When stock prices are trading at their highs, it means traders have a bullish market sentiment.
The bullish percentage measures the number of stocks with bullish patterns based on point and figure charts. Normal markets have a bullish percentage of around 50%. When the measure is 80% or higher, it means market sentiment is extremely bullish and the market is likely overbought. Likewise, when the number is 20% or below, it is a bearish market sentiment indicative or market that is oversold. Traders sell when the market is overbought and buy when the market is oversold.