Sentiment Indicators & Market Psychology

What is Market Sentiment?

Definition: Overall attitude (bullish/bearish) of investors toward markets.

Importance: Sentiment drives short-term price movements; fundamental value drives long-term.

Sentiment Indicators

VIX (Volatility Index): "Fear gauge"

• VIX > 30: High fear
• VIX < 15: Complacency
• Contrarian use: High VIX = buying opportunity

Put/Call Ratio: Ratio of put options to call options

• High ratio: Bearish sentiment
• Low ratio: Bullish sentiment

AAII Sentiment Survey: % of individual investors bullish/bearish

• Extreme readings (>60% bulls or >40%bears) signal reversals

Fund Flows: Money into/out of equity mutual funds

• Large inflows: Peak optimism (contrarian sell signal)
• Large outflows: Peak pessimism (contrarian buy signal)

Using Sentiment Contrarily

Crowd is Wrong at Extremes:

• Extreme optimism → Overvalued → Sell
• Extreme pessimism → Undervalued → Buy

Example: March 2020 COVID crash

• VIX hit 80+ (extreme fear)
• Contrarian signal: Buy
• Result: Market +50% in 5 months

Indian Context: During 2021 bull run, record Dem at account openings signaled euphoria → Correction followed.

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