Market sentiment refers to the attitude of investors towards the financial market or a particular stock or security. It is a feeling towards a market, which includes crowd psychology. It is shown through the activity and price movement of securities traded in the market. In short, rising prices indicate a bullish market sentiment and falling prices indicate a bearish market sentiment.
Market sentiment is also called Investor sentiment since it measures how investors feel towards a market or security. It is not always based on fundamentals like the balance sheet or income statement. Day traders rely on market sentiment to measure and profit from short term price movements caused by investors attitudes towards a security.
Here are some popular indicators you can use to measure market sentiment:
The VIX (CBOE Volatility Index) – Also known as the Fear Index. This index is driven by options trading. Traders add moving averages to the VIX to determine if it is high or low. a rising VIX means an increase for insurance in the market. This can be a sign of increasing volatility.
The High-Low Index – This index looks at the number of stocks making 52 week highs and stocks making 52 week lows and compares them. Below 30 means stock prices are near lows and above 70 means they are trading near highs.
Moving Averages – This is what investors typically use . When the 50 day Simple Moving Average(SMA) crosses above the 200 day SMA, it is referred to as a “Golden Cross”. It indicates that the momentum has shifted to the upside. This creates a bullish sentiment. When the 50 day SMA crosses below the 200 day SMA it is known as a “Death Cross”. It suggests lower prices, creating a bearish sentiment.
Conclusion
Market sentiment alone is not enough to form the basis of a trading strategy. Still, do not underestimate it. It is a great tool to add more to your market /stock analysis. People and perceptions are what drive prices higher or lower. News and developments are 24hrs. Try to absorb as much of this as you can, listening to bulls and bears for a more complete picture of market sentiment. It may help you to see where the market is going next.
Want to know more about investing and how to get into the market, see my post “Thinking about Investing? 5 Tips to get you started”. @ advanceyourday.com