Definition
Market sentiment reflects the collective attitude and emotions of investors toward the market or a specific security. Sentiment can be bullish (optimistic, expecting prices to rise), bearish (pessimistic, expecting declines), or neutral. Sentiment is measured through surveys, put/call ratios, VIX, fund flows, and other indicators. Extreme sentiment often precedes market turning points - excessive bullishness near tops, extreme bearishness near bottoms. Contrarian investors specifically trade against extreme sentiment.
Example
In late 1999, sentiment was extremely bullish - surveys showed 75% bulls. This extreme optimism preceded the dot-com crash. In March 2009, sentiment was extremely bearish with over 70% bears - preceding a decade-long bull market.
FAQ
What is Market Sentiment?
The overall attitude of investors toward a market or security.
Why is Market Sentiment important?
Market Sentiment helps investors evaluate behavioral finance and make more informed decisions.