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Table of Contents
Market sentiment describes the way investors feel about stocks, a particular company or industry, or the overall market. What is market sentiment useful for? Market sentiment indicators are a gauge of crowd psychology; they tell you how optimistic or pessimistic investors are feeling at any given point.
While market sentiment is not predictive of market outcomes, it can be used to assess whether the prevailing mood about a certain sector or an asset is bearish or bullish.
In that way, traders may use sentiment analysis in combination with other tools, such as technical or fundamental analysis, to help guide investment decisions.
Key Points
• Market sentiment is an expression of how investors feel about stocks, individual companies, or the market as a whole.
• Understanding market sentiment and how it influences asset price movements can be useful when making trading decisions.
• There are several indicators investors can use to gauge market sentiment; each of which measures a different aspect of investor outlook.
• Sentiment analysis does not guarantee specific outcomes, and price changes can occur swiftly if the mood of the market shifts.
What Is Market Sentiment, and Why Does It Matter?
Market sentiment is a measurement of the current market temperature viewed through investors’ eyes. Paying attention to stock market insights can help you be a more informed investor.
Sentiment is typically discussed in terms of whether the market mood around trading stocks or other assets is “bullish” or “bearish.”
• Bearish sentiment indicates pessimism among investors and is marked by a period of declining stock prices. A bear market occurs when the price of an index drops by 20% or more over at least a two-month period.
• Bullish sentiment suggests that investors are optimistic, with prices rising. A bull market happens when the price of an index rises by 20% or more over at least a two-month period.
Is a bull vs. bear market better? Market sentiment doesn’t indicate whether a particular investment is a good buy or a bad one, nor can it accurately predict which way stock prices will move. Instead, it’s a tool for understanding how investor psychology can impact market movements.
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How Is Market Sentiment Measured? 5 Common Indicators
Market sentiment is measured using different indicators. An indicator is a mathematical model that uses market data to identify patterns or trends in price movements, which can be used when trading online or through a brokerage.
1. The CBOE Volatility Index (VIX) or “Fear Index”
The CBOE Volatility Index, or VIX, measures the 30-day expected volatility of the U.S. stock market, based on real-time prices for S&P 500 Index options. The VIX is a forward-looking indicator that measures future implied volatility.
Implied volatility means how much the market expects a stock or security’s price to swing over a set period. Whether the VIX, or Fear Index, is high or low offers insight into how investors are thinking in the short-term.
• When the VIX is high, implied volatility is high. Projected price swings typically move across a broader range.
• When the VIX is low, implied volatility is low. Projected price swings typically move across a narrower range.
Why it’s useful: The VIX helps investors gauge market moods and identify short-term trading opportunities. It’s also useful for developing defensive strategies when sentiment indicates that increased stock market volatility may be on the horizon.
2. The Fear & Greed Index
The Fear & Greed Index measures market sentiment on a scale from 0 to 100, with extreme fear at one end and extreme greed at the other. Where the Index falls on any given day is determined by seven indicators:
• Market momentum
• Stock price strength
• Stock price breadth
• Put and call options
• Market volatility
• Safe haven demand
• Junk bond demand
The Fear and Greed Index is updated regularly as underlying indicator data is refreshed.
Why it’s useful: The Fear & Greed Index gauges the mood of the market and how it motivates buying or selling behavior. It helps investors identify opportunities to buy stocks at a discount when fear is high, and sell investments at a profit when the market appears to be overvalued.
The Put/Call Ratio
The put/call ratio measures the number of puts versus the number of calls over a specified time frame. If you’re not sure what those terms mean, here’s a quick definition of each one:
• A “put” is an options contract that gives a buyer the right to sell shares of an underlying stock at a set price (called a strike price) by a certain date.
• A “call” is an options contract that gives a buyer the right to buy shares of an underlying stock at a set price by a certain date.
When you’re talking about puts and calls, you’re talking about options trading, a speculative investment strategy. So what does this have to do with market sentiment?
A high put/call ratio (above 1) indicates the market is bearish and prices may be on the decline. A low put/call ratio (below 1) suggests a bullish market, with prices set to rise.
Why it’s useful: If the PCR is high and prices are down, that could be a buying opportunity. If the PCR is low and prices are up, it could hint at inflated optimism and an overvalued market, in which case it could make sense to sell.
4. Bull/Bear Sentiment Surveys
Bull/bear sentiment surveys aim to gauge market feeling by asking a simple question: Where do you think the market is headed?
The American Association of Individual Investors (AAII) Sentiment Survey, for example, asks investors to rate whether they feel bullish, bearish, or neutral about the market looking ahead to the next six months. This investor sentiment survey is conducted weekly, and AAII maintains historical records that illustrate how bullish and bearish feelings have shifted over time.
For example, here’s how investors responded for the week ending August 13, 2025:
• Bullish (29.9%)
• Neutral (24%)
• Bearish (46.2%)
The historical averages for each category are 37.5% bullish, 31.5% neutral, and 31% bearish.
Why it’s useful: Bull/bear sentiment surveys put a finger on the pulse of how investors are thinking, and what they expect to see in the markets in the near term. Analyzing trends in sentiment from week to week can be useful in identifying potential market tops and bottoms, in conjunction with other indicators and analysis tools.
5. High/Low Indicators
High/low indicators look at stock prices measured in highs and lows over a set period. The NASDAQ 52-week high/low, for example, looks at stock prices over the previous 52 weeks. It’s a type of lagging indicator, meaning it looks backward at historical data, rather than forward, to make assumptions about market sentiment.
This indicator can tell you whether the market is trending bullish or bearish:
• A higher index suggests that more stocks are reaching new highs, and the mood of the market is bullish overall.
• A lower index indicates that more stocks are reaching new lows, and that the market is moving in a bearish direction.
Some high/low indicators use moving averages while others do not. A moving average reflects the average closing price of a stock over a specific period.
Why it’s useful: High/low indicators can be used with other types of technical indicators to either reinforce or contradict assumptions you might have made about the market, based on sentiment. Extreme highs or extreme lows on a high/low indicator may hint at favorable windows for buying or selling.
What Is Sentiment Analysis?
Sentiment analysis means reviewing data from one or more market indicators to understand what’s driving stock price movements, and/or where they may be going next. Essentially, you’re asking yourself two questions:
• How do investors feel about a stock/company/the market?
• What kind of trading activity are those feelings likely to translate to?
Sentiment analysis tools can make it easier to digest market sentiment data and get a feel for what’s happening and why it’s happening. There are pros and cons to this approach.
Advantages of Analyzing Market Sentiment
On the pro side, sentiment analysis can help you make connections between investor attitudes and their behavior. That could, in turn, make it easier to avoid missteps in periods of higher or lower volatility.
For example, you may be more inclined to buy into the market when others are panicking if you understand what’s behind the panic.
Downside of Using Market Sentiment
In terms of the cons, sentiment analysis is not a perfect science. If the underlying data that a sentiment indicator uses is flawed, for instance, that can skew results and potentially lead to mistimed investment decisions.
Likewise, following a single indicator without comparing it to other sentiment measures could create an incomplete picture of the market.
If you’re interested in how to do sentiment analysis, you may start with your online brokerage. Many brokerages offer access to proprietary sentiment analysis tools as an account benefit. There may be a slight learning curve you’ll have to master, but these tools can help you get a clearer idea of what’s driving the market.
How to Use Market Sentiment in Your Investment Strategy
Understanding market sentiment and insights can give you some powerful leverage when making investment decisions. So, how do you put it to work to grow your portfolio? Here are three possibilities for utilizing market sentiment as an investor.
Using Sentiment as a Contrarian Indicator
One of the biggest mistakes investors make is following the pack and allowing the overall mood of the market to pull them along. The 2008 financial crisis stands as a cautionary example of how fear can lead to panic selling and trigger a market crash.
Market sentiment, when viewed through a contrarian lens, embodies Warren Buffett’s advice to “be fearful when others are greedy and to be greedy only when others are fearful.” In other words, be worried about the markets when everyone else is buying in, and look for the buying opportunities when others are cashing out.
Sentiment analysis helps you determine when and if a particular market mood, such as panic, is justified and how to act accordingly. Taking this type of approach could potentially help you avoid unnecessary losses and/or purchase stocks at bargain prices.
The Risks of Relying Solely on Sentiment
Looking at market sentiment while excluding other types of indicators can put you at a disadvantage for a few reasons.
• Sentiment can change on the turn of a dime, which may not suit a long-term investing strategy.
• Rumors or misreported market news can trigger shifts in sentiment that don’t reflect the true condition of stock prices and valuations.
• Market sentiment doesn’t factor in fundamentals, which measure a company’s financial health and strength, leaving you with a limited picture of what a stock may truly be worth.
• Sentiment is tied to crowd behavior, and when the mood turns negative, that may spur panic-selling.
Combining technical indicators that measure market sentiment, along with fundamental indicators that are grounded in real-world data, can give you a more well-rounded view of market trends.
Using AI to Measure Market Sentiment
Artificial intelligence (AI) is reshaping the investment landscape, and a new crop of AI-driven sentiment analysis tools is changing the way investors study the markets. Whether you should use them or not depends on your stance on AI and the perceived benefits.
The advantage of using AI for market sentiment analysis is that it can digest large amounts of data quickly. If you’re day trading, speed matters. Mistiming a decision to buy or sell, even if you miss the mark by a few minutes, could have a significant impact on the amount of profit (or loss) you notch for the day. AI isn’t influenced by emotion either, so you can trust its analysis to be objective.
The disadvantage, of course, is that AI is still an imperfect tool. If the data being fed to an AI sentiment analysis tool is inaccurate, then its findings will be inaccurate too. You can also end up with skewed results when tools rely too heavily on historical data or analyze sentiment without any real understanding of the context behind it.
The Takeaway
Market sentiment affects what happens in the market, with negative sentiment potentially pushing prices down and positive sentiment driving them up. Sentiment analysis can help you understand how investors feel and what that, in turn, may mean for your portfolio.
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FAQ
Where can I find current market sentiment data?
You can find current market sentiment data using analysis tools or indicators that update in real-time. The Fear & Greed Index is one example; the AAII Sentiment Survey is another. When assessing market sentiment data, consider both the most recent numbers available as well as the historical data so you have some context for how they compare.
Is market sentiment the same as technical analysis?
No, they’re different tools. Market sentiment is a measure of how investors feel about the market at a particular moment. Technical analysis involves using various indicators to draw conclusions about stock trends and price movements. Many technical analysis tools take market sentiment into account, either directly or indirectly.
Can market sentiment predict a stock market crash?
No indicator can predict a stock market crash with 100% accuracy. While investor sentiment is often seen as an important factor that can contribute to market crashes, sentiment alone cannot tell you exactly when stocks will bottom out.
How do news and social media affect stock market sentiment?
News reports and social media posts can affect the way investors feel about the market. If news outlets report that a particular stock sector is reporting lower-than-expected earnings, for example, or an industry insider tweets a rumor about a major merger that may be upcoming, that can influence investors’ attitudes toward the market.
What is the difference between bullish and bearish sentiment?
Bullish sentiment means that investors feel optimistic about the market in general and that prices are trending upward. Bearish sentiment means that investors are more pessimistic and that stock prices are trending down.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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