Market Sentiment

Market prices reflect not only fundamentals, such as earnings and interest rates, but also how investors feel. When sentiment is positive, investors are more willing to buy and take risks, pushing prices up. When sentiment is negative, they become cautious and sell.

Sentiment can be measured in several ways. Surveys ask investors whether they expect prices to rise or fall. Market indicators, such as the VIX volatility index, the ratio of put to call options and flows of money into and out of funds, also provide signals. Some analysts track news and social media.

For example, after a series of strong economic reports and rising share prices, surveys may show many investors expecting further gains, a sign of bullish sentiment.

Some investors use sentiment as a contrarian signal, believing extreme optimism often comes near market peaks and extreme pessimism near lows. Sentiment can change quickly and remain extreme for long periods, so it is usually considered alongside other analysis.