The aggregate attitude of investors and other market players is referred to as market sentiment. It depicts the market’s overall view of where prices could go in the future. When prices rise, it shows a positive market attitude, implying that the trend will likely continue, whereas dropping prices signal a negative market feeling, implying that the trend will most likely terminate.
Investor sentiments are more important than fundamentals in determining market mood. As a result, market sentiment is sometimes seen as a psychological phenomena. It’s comparable to herd mentality, in which people follow the herd rather than expressing their unique ideas. Emotions, such as fear and greed, often play a role in trading.
Consider the case of bitcoin, which is growing in value. Investors who already own bitcoin watch their holdings appreciate in value, prompting others – typically inexperienced traders – to enter the market in order to avoid missing out on the rewards. The optimistic mood leads the price of bitcoin to soar even more as demand grows. The market price would eventually reach a point where investors would be unable to maintain it and would leave their positions, resulting in a negative run on bitcoin.
The stock market’s investor sentiment
The stock market’s collective assessment of future price trends for an individual company’s shares and/or the stock market as a whole is known as investor sentiment. The volume of interest in a specific stock is monitored each day and reported by exchanges, making market sentiment in the stock market one of the easiest to gauge.
Market sentiment is a common indicator for identifying overvalued and undervalued stocks. Speculators can profit from the movement by knowing whether share prices are trading above or below their intrinsic value. They can also profit from a reversal back toward a more correct price by understanding whether share prices are trading above or below their intrinsic value.
How to Interpret Market Attitude
Because it’s virtually hard to precisely quantify opinions and individual psychology, reading market mood is tough. However, a few technical indicators may be utilised to obtain information on which way prices are heading, particularly when they reach extremes that indicate emotional trading.
Reading market mood indicators allows you to determine if a given asset is trading in accordance with expectations, above or below its inherent worth, or both.
Due to variations in data availability and dependability, the most relevant indicators for sentiment will vary depending on whether the asset is exchange traded or OTC.