A:

First of all, when people talk about investor sentiment, or market sentiment, they are referring to the aggregate attitude in the investment community. Essentially, investor sentiment is an approximate measurement of the stock market's attitude at a given time - it could be overly bullish, bearish, or somewhere in the middle. This type of analysis would usually be employed by a short-term trader or technical analyst trying to reap profits from short-term movements in stock prices. For example, if a short-term trader saw stock prices rising across the board, it would probably be a good indication that market sentiment is currently bullish. In other words, there are many more people who are willing to buy stocks and bid up prices than there are those willing to sell.

Specific quantitative methods have been developed in order to attempt to measure (as best as possible) investor sentiment. Companies such as Chartcraft publish sentiment indexes that provide investors with a running measurement of market conditions. Chartcraft's Investors Intelligence sentiment index quantifies and compiles investment advisor reports and insider activity to gain a bird's-eye view of the market's overall outlook. Companies like Chartcraft publish their sentiment indexes on an ongoing basis, so investors can track the changes in market sentiment over time and use the information to attempt to predict turning points in bull and bear markets.

By noting changes in market sentiment, investors attempt to determine whether the market's mood is too bullish, too bearish or relatively normal. If investors can obtain an accurate measurement of the market's sentiment, they can use it for their benefit. For example, if Chartcraft's Investors Intelligence index (a contrarian methodology) shows that the market is currently extremely bullish, an investor employing the index would take that information to mean that the market will soon take a correction as it returns to normal sentiment conditions. Thus, an investor who wanted to go long in blue-chip stocks would not buy stocks at this time, but would wait until the market sentiment index changed to bearish conditions, hopefully making stocks underpriced and set for a strong upward run.

We have touched on just one of the potential uses of market sentiment indicators. To learn more about market sentiment and its implications for investors, read Investors Intelligence Sentiment Index.

RELATED FAQS
  1. What are the benefits of using open interest as an indicator?

    Find out more about the open interest of option contracts, what the open interest indicates and the benefits of monitoring ... Read Answer >>
  2. Do rising unemployment rates tend to increase or decrease investor sentiment and ...

    Discover whether rising unemployment rates tend to increase or decrease consumer confidence and investor sentiment. Unemployment ... Read Answer >>
  3. What's the difference between consumer confidence and consumer sentiment?

    There isn't a difference between consumer confidence and consumer sentiment. Both terms are used to refer to the degree of ... Read Answer >>
  4. What is the difference between business intelligence and competitive intelligence?

    Understand the difference between business intelligence and competitive intelligence. Learn why both are important for the ... Read Answer >>
  5. What are the most common market indicators to follow the European stock market and ...

    See which market indicators and major market indexes are used most frequently by traders and analysts to measure the European ... Read Answer >>
  6. How do investors lose money when the stock market crashes?

    Over the last hundred years, there have been several large stock market crashes that have plagued the American financial ... Read Answer >>
Related Articles
  1. Options & Futures

    Market Bottom: Are We There Yet?

    No one rings a bell when the bear market's over, but that doesn't mean there's no way to predict a bottom.
  2. Investing Basics

    What Type Of Trader Are You?

    There are different ways stock traders attempt to profit from market movements. Which of the strategies do you use?
  3. Retirement

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn the measures and how to analyze them.
  4. Investing News

    German Stocks Fall on Weak Sentiment

    According to ZEW, German economic sentiment index tumbled from 10.2 in January to 1.0 in February, marking its lowest level since October 2014.
  5. Active Trading Fundamentals

    Forces That Move Stock Prices

    You can't predict exactly how stocks will behave, but knowing what affects prices will put you ahead of the pack.
  6. Investing

    Investors Are Bearish: It's Time To Buy

    Note from the Publisher: As a valued StreetAuthority reader, I'd like to cordially invite you to a special event.Two of StreetAuthority's leading analysts sat down for a one-on-one interview ...
  7. Mutual Funds & ETFs

    Index Investing: What Is An Index?

    An index is a statistical measure of the changes in a portfolio of stocks representing a portion of the overall market. It would be too difficult to track every single security trading in the ...
  8. Retirement

    Economic Indicators: Consumer Confidence Index (CCI)

    By Ryan Barnes Release Date: Last Tuesday of the month Release Time: 10am Eastern Standard Time Coverage: Previous ...
  9. Financial Advisors

    How to Separate Emotions from Investing Decisions

    With stock market volatility, financial advisors are finding they're doing more hand-holding to help clients navigate turmoil.
  10. Active Trading Fundamentals

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of the two types of market conditions.
RELATED TERMS
  1. Market Sentiment

    The overall attitude of investors toward a particular security ...
  2. Sentiment Indicator

    A graphical or numerical indicator designed to show how a group ...
  3. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
  4. Tick Index

    The number of stocks trading on an uptick minus the number of ...
  5. ZEW Economic Sentiment

    A monthly economic survey. The ZEW Economic Sentiment is an almalgamation ...
  6. Ovoboby

    A condition in which a market is considered to be overbought, ...
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center