Market Sentiment
The overall attitude and emotional disposition of market participants toward a particular security or financial market at a given point in time.
What is Market Sentiment?
Market sentiment refers to the prevailing attitude — bullish (optimistic) or bearish (pessimistic) — of investors and traders toward a market, sector, or individual security. Sentiment is driven by a complex mix of news, economic data, earnings releases, geopolitical events, and behavioral biases. Contrarian investors watch sentiment as a contrary indicator: extreme bullishness may signal a market top (too many buyers already in), while extreme bearishness can signal a bottom. Common quantitative sentiment indicators include the CBOE Volatility Index (VIX), the American Association of Individual Investors (AAII) sentiment survey, the put/call ratio, and the CNN Fear and Greed Index. Sentiment can diverge significantly from underlying fundamentals in both directions for extended periods.
Example
In November 2022, the AAII individual investor sentiment survey showed bearish sentiment at 60% — among the most extreme pessimistic readings in the survey's history. Contrarian analysts at the time cited this extreme bearishness as a potential buy signal, arguing that when nearly all investors are already bearish, there are fewer sellers left to push prices lower. The S&P 500 subsequently gained approximately 25% over the next 12 months.
Source: Investopedia — Market Sentiment