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Market Sentiment Indicator

Patrick Stockdale
Written by Patrick Stockdale | March 16, 2022

What Are Market Sentiment Indicators?

Market sentiment indicators are technical analysis indicators and indexes that measure and quantify the overall sentiment or crowd psychology of market participants towards a particular financial market.

Market sentiment indicators attempt to display both bullish and bearish sentiment either overlaid on the price chart of a financial market, below the price chart on it’s own scale or on a completely separate chart on it’s own in the form of a graphical display or a set of numbers.

How Market Sentiment Indicators Work

Market sentiment indicators measure how much optimism or pessimism there is in a particular financial market or a group of markets. It shows the general consensus amongst traders, investors and market participants. Essentially, a market sentiment indicator will measure the market sentiment in a market.

Typically, a trader or investor will seek to use market sentiment indicators in their trading and investing strategies to help gauge what the crowd psychology towards a specific market.

Generally, a trader or investor will seek to find extreme readings on market sentiment indicators, either when the readings are showing extreme levels of bullishness or extreme levels of bearishness.

Extreme readings of bullish or bearish sentiment can signal market participants are extremely greedy or extremely fearful.

An extreme reading can also signal an imminent price reversal in the market.

These extreme readings form potential buying and shorting signals for traders and investors, especially contrarian traders and investors that make trading and investing decisions against the general crowd consensus.

Market Sentiment Indicators Examples

Examples of market sentiment indicators include:

  • Moving Averages
  • CBOE Volatility Index (VIX)
  • CBOE Put Call Ratio
  • US Investor Sentiment % Bullish
  • US Investor Sentiment % Bearish
  • High Low Index

Below are detailed explanations of these market sentiment indicators.

Moving Averages

Moving Average Sentiment

A simple technical indicator to measure market sentiment is the moving averages indicator.

In the above price chart of Amazon stock, when price is above the 50 day moving average, it indicates bullish sentiment in the stock.

When the price is below the 50 day moving average, it indicates bearish sentiment in Amazon stock.

This is an easy to use indicator to measure the sentiment in any given market.

When prices of financial markets are above well known moving averages like 50, 100 or 200 day moving averages, it is considered to be bullish mood, whereas when prices are below these moving averages, it is considered to be a bearish or negative sentiment in the market.

CBOE Volatility Index (VIX)

Market sentiment indicator VIX example

The above price chart is the VIX index. The VIX index, also known as the “fear index” measures the amount of put options activity in the S&P 500 index options market.

When the VIX index price is rising, it is an indication that there is an increase in fear in the market as traders and investors are buying more put options in the S&P500 which is a bearish signal.

Put options is betting that the price will go lower.

An increase in the VIX can show that the sentiment is shifting from a calm and bullish sentiment to a more risky and bearish sentiment in the market.

CBOE Put Call Ratio

put call ratio

The put call ratio is a ratio of all the puts buying versus all the calls buying in a market on a particular day. It is a gauge of the overall mood in the market.

It can be calculated for any specific stock or for an index. It is a useful tool for measuring investors sentiment.

Lower readings on the ratio are considered bullish sentiment whereas higher ratio readings are considered bearish or negative sentiment.

US Investor Sentiment Percentage Bullish Indicator

US Investor Sentiment % Bullish Chart

The US Investor Sentiment % bullish indicator is a technical analysis indicator that measures the percentage of bullish investors from the American Association of Individual Investors (AAII) Sentiment Survey in the United States.

A higher percentage reading means investors express more bullish and positive sentiment in the market whereas a lower of decline reading means investors express more bearish or negative sentiment in the market.

The indicators is updated daily so traders and investors can see on a daily basis the overall sentiment of the market.

US Investor Sentiment Percentage Bearish Indicator

US Investor Sentiment % Bearish Chart

The US Investor Sentiment Percentage Bearish Indicator measures the percentage of bearish investors from the AAII Sentiment Survey and displays it graphically as a percentage (as shown above).

Higher readings means investors are not optimistic and have a negative sentiment for the financial markets.

Lower percentage readings means investors are more positive and bullish about the markets.

High Low Index

The high low index is another useful indicator to measure the sentiment within the stock market.

The high low index measures stocks making new 52 week highs versus stocks making new 52 week lows.

A quick glance at this index can help a trader or investor to understand the overall sentiment in the stock market.

When there is a large amount of stocks making new 52 week highs in prices (as shown on the high low index), this is an indication of increasing bullish sentiment in the stock market.

When there is a large amount of stocks making 52 week lows, this is an indication of negative or bearish sentiment in the stock market.

Market Sentiment Indicators Limitations

The limitations of market sentiment indicators are:

  • Extreme bullish or bearish sentiment indicator readings can last for months: When there is an extreme bullish or bearish sentiment readings, it can last for months before price reverses in the financial market.
  • Extreme sentiment indicator readings might only result in small corrective price reversals: Extreme sentiment readings in sentiment indicators may result in only a small correction in price for the reading to return to neutral. This makes it tough for contrarian traders and investors.
  • They don’t work well on their own: Market sentiment indicators do not work well without the use of other technical analysis tools like support/resistance levels, chart patterns or other popular technical indicators.

Frequently Asked Questions

Below are some frequently asked questions about market sentiment indicators.

Can Market Sentiment Indicators Read The Mood Of A Financial Market?

Yes, a market sentiment indicator can read and display the overall tone or mood of a financial market.

Are Market Sentiment Indicators The Same As Technical Analysis Indicators?

Yes, a market sentiment indicator can be labelled a technical analysis indicator. They look the same as any other technical indicator on a price chart.

Are Market Sentiment Indicators Used In Technical Analysis Or Fundamental Analysis?

Market sentiment indicators can and are used in both technical analysis and fundamental analysis.

For technical analysis, market sentiment indicator examples include moving averages, VIX index, Put Call Ratio, High Low Index etc.

For fundamental analysis, market sentiment indicator examples include the Commitment Of Traders Report, News Sentiment Analysis Scanners and economic events sentiment analysis.