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. Why is it important for traders and investors to follow market indicators?

    Learn about market indicators such as the Advance/Decline Index and market breadth. Discover why these indicators are so ... Read Answer >>
  4. 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 >>
  5. How do traders and technical analysts interpret the Average True Ranges (ATR)?

    Learn about average true range, a volatility indicator used by technical analysts to pinpoint changing trends and bullish ... Read Answer >>
  6. What does a rising open interest on a stock signal?

    Learn more about the open interest on stock options, what the open interest of calls and puts indicates, and what a rising ... Read Answer >>
Related Articles
  1. Trading

    Investors Intelligence Sentiment Index

    This indicator can give a overall sense of bull and bear forces - learn what it is and how it's constructed.
  2. Trading

    Forex Market Sentiment Indicators

    Sentiment Indicators are another tool that can alert traders to extreme conditions.
  3. Investing

    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.
  4. Personal Finance

    Tesla Model 3 Launch Reminds Us to Sell the News

    Tesla’s Model 3 launch was associated with very positive sentiment among investors, but when it comes to a new launch, the taller they are, the harder they fall.
  5. Investing

    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?
  6. Insights

    An Introduction to Stock Market Indices

    Investopedia explains the five most talked about indices and what makes them all different.
  7. Financial Advisor

    What Does Stalled Consumer Sentiment Mean?

    Consumer confidence continues to remain low and it may take major changes in the economy before an optimistic outlook returns.
  8. Trading

    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.
RELATED TERMS
  1. Market Sentiment

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

    A measure of investor sentiment in the market measured by looking ...
  3. Consumer Sentiment

    A statistical measurement and economic indicator of the overall ...
  4. Sentiment Indicator

    A graphical or numerical indicator designed to show how a group ...
  5. Bull/Bear Ratio

    A market-sentiment indicator published weekly by Investor's Intelligence ...
  6. Social Sentiment Indicator

    A measurement based on aggregated social media data that helps ...
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center