Market sentiment indicators are often used to gain a better sense of the direction of the stock market. Yet, you need to understand how sentiment indicators work before using them to plan your investment portfolio.
Here are nine things you should know about market sentiment indicators.
1. Sentiment Indicators Help Gauge Market Psychology
Investors should know that sentiment indicators are not technical metrics for analyzing the state of the stock market. Instead, the sentiment indicators evaluate investor attitudes.
Analyzing sentiment indicators helps you understand whether investors are feeling bullish or bearish about the market. Bullish investors think that the market will rise, while bearish investors predict a downward trend.
2. Sentiment Indicators Are Not Market Timing Signals
Market sentiment indicators are not intended as timing signals. For example, low consumer sentiment in a particular market does not automatically signal falling stock prices.
Sentiment indicators should be used in conjunction with various technical indicators to make more informed investment decisions. Technical indicators help you confirm whether investor sentiment is pointing to a change in the market.
3. Investors Can Review a Variety of Sentiment Indicators
Dozens of investor groups and financial organizations maintain individual sentiment indicators. Instead of focusing on a single sentiment indicator, investors should review a variety of sentiment trackers from reputable sources.
4. The Fear Index Tracks the Volatility of the Market
The CBOE Volatility Index (VIX) is one of the most used sentiment indicators. It is also often called the “fear index,” as it measures the amount of volatility in the stock market.
After positive economic news, the VIX is used for sentimental analysis. A high fear index indicates that investors are less likely to act on positive news developments.
5. The Fear and Greed Index Predicts Bear and Bull Markets
The Fear and Greed Index is comparable to the CBOE Volatility Index. Both indicators help analyze investor sentiment. However, instead of focusing on whether investors are bearish, the Fear and Greed Index can also indicate that investors are feeling greedy, leading to higher stock prices.
The Fear and Greed Index was developed by CNN Money and ranges between 0 and 100. A low score indicates fear, while a high score indicates greed.
6. The NBP Indicator Helps Predict an Overbought or Oversold Market
The NYSE Bullish Percentage (NBP) is based on technical analysis of companies on the New York Stock Exchange that currently have a bullish pattern. The NBP ranges from 0% to 100%.
A high percentage indicates that the market is currently overbought and set for a correction. Conversely, a low NBP may signal that the market is oversold and ready for a rally.
7. The High/Low Indicator May Reveal the Direction of the Market
The high/low indicator helps predict which direction the market is about to take based on market volatility. It tracks stocks reaching new highs and stocks reaching new lows. A spike in either direction represents a volatile market.
8. The 200-Day Moving Average Helps Determine Investor Sentiment
The NYSE 200-day moving average tracks stocks that are trading above their average. A high percentage indicates that the market is set for a correction, and the prices may drop. A low percentage signals bullish activity, as stocks are training at lower-than-average prices.
9. Retail Investor Activity Influences the Odd-Lot Trading Statistics
You can use the odd-lot training statistics as an indicator of retail investor activity. The indicator measures shares bought and sold in odd lots, including lots of less than 100 shares for the typical stock. Retail investors are more likely to buy and sell odd lots, making this a valuable indicator for gauging consumer sentiment.
In the end, market sentiment directly influences the direction of the stock market. When investors are fearful, they are more likely to sell a stock, which brings down the markets. Conversely, when investors are greedy, stock prices tend to rise. If you want to make more informed stock picks, remember to pay attention to the indicators discussed.
