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Market Sentimental is exactly what is sounds like. This is based solely on what the trader/investor feels that will happen after some economic data, geopolitical events or regional/national/global news comes to the fore.
Simply put it refers to the overall attitude, instinct and belief of the investor towards a particular asset/stock or financial market.
Broadly, when the market believes things are going well it is called a bull market, bulls have horns, point up. Conversely negative sentiment brings a bear market down, bears claws “point down”.
Yet market sentiment can be very important for investors. Reading the market mood can allow them to profit from the changing direction.
Identifying the prevailing market sentiment, in this volatile and ever moving market can be difficult.
Investors have different opinions, they may be entering or leaving the market at a specific time and can distort sentiment.
If, as an example, a big hedge fund decides to cash in on their big tech portfolio, even if it has performed well and sell, onlookers may perceive the stock/company is not looking good in the short/medium term and may also follow suit. Sentiment may push the stock down when others sell, with no real understanding of why. Outlook matters and the more you get to understand what’s going on, the better-informed decisions you can make.
Some investors bet against overall sentiment and go the other way, because of their own analysis and judgement and just as importantly, the time factor involved in the investment.
They may profit by finding stocks that are overvalued or undervalued based on market sentiment. They use various indicators to measure market sentiment that help determine the best stocks to trade.
Common technical sentiment indicators include:- As I always mention, this is not an exact science and I am generalising to give a brief overview.
The Cboe Volatility Index, or VIX, also known as the fear index, is driven by option prices, stocks/ indices. A rising VIX means an increased need for awareness in the market. In general, VIX starts to rise during times of financial stress and drops as investors become more optimistic.
In technical analysis, an index of the number of stocks reaching a new high minus the number of stocks reaching a new low. This is used to determine whether a market movement is sustainable. A positive high-low index when the market has gone up means that that market is likely to continue to rise. However, mixed signals (i.e. a negative high-low index when the market has risen or vice versa) indicates that the current market movement is unlikely to continue. Traders usually apply the indicator to a specific underlying index, such as the S&P 500, Nasdaq 100 or NYSE Composite.
In technical analysis, the moving average is an indicator used to represent the average closing price of the market over a specified period. Traders often make use of moving averages as it can be a good indication of current market momentum and therefore sentiment.
Two noticeable examples of Market Sentiment are the Great Depression & World Banking Crisis of 2007/8
The Great Depression was the worst economic downturn in the history of the industrialised world, lasting from 1929 to 1939. ... By 1933, when the Great Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country's banks had failed.
Bearish sentiment damaged investor confidence that caused the stock market to have its worst December performance since 1931. The broad-based S&P 500 index fell 9.2% for the month, while the Dow Jones Industrial Index (DJIA), comprising of 30 industrial bellwether companies, shed 8.7% over the period.
In 2008 the financial crisis peaked with the September collapse of US investment bank, Lehman Brothers. Events had been building to this crescendo for over a year beforehand, with other lenders going bust such as Bear Stearns and Northern Rock in the U.K.
What brought all these institutions down, and subsequently caused a stock market crash and recession was a fundamental problem in the world's financial system.
Namely, that banks had become massively over-leveraged, with their books almost entirely consisting of borrowing and lending, with very little liquid cash reserves when needed.
As many financial institutions became more aware of this and the risks it implied, sentiment kicked in, and they subsequently stopped lending to each other and to businesses, causing a deep finance crash globally.
A simple example.
When a trader hears that Apple Inc just lost a patent lawsuit, his first thought is that the stock will fall. This is most likely what goes through most trader’s minds that are dealing with Apple so they will short the stock. A chain effect will create the stock price to fall.
What is the market sentiment today?
Today, we seem to have a more resolute market, although volatile and the trade war rhetoric and the Covid19 pandemic caused market downturns they have rebounded strongly with the hope that the pending vaccines will put as back to normal.
Just as importantly, investors are finding that the traditional investments such as bonds, fixed interest and even property are offering very low returns, thus the appetite for risk in stocks remains buoyant.
Market volatility is becoming the norm and it really depends if you are an investor or trader as how to gauge sentiment and use to your advantage.
Trading or buying?