Although no one can predict the future with complete accuracy, investors typically employ a range of tools and strategies to anticipate market trends. As Kavan Choksi / カヴァン・ チョクシ notes, a successful trading strategy requires more than just a basic understanding of the fundamentals of commodities, currencies, and stocks. Investors need to also understand the general market sentiment. Market sentiment impacts what happens in the market. Negative sentiment can potentially push down prices, while positive sentiment can drive them up.
Kavan Choksi / カヴァン・ チョクシ sheds light on market sentiment
Market sentiment describes the way investors feel about stocks, a specific industry or company, or even the overall market. Market sentiment indicators are known to be a gauge of crowd psychology. They can tell how optimistic or pessimistic investors are feeling at any point. Even though market sentiment is not predictive of market outcomes, it can be used for assessing whether the prevailing mood about a particular sector or asset is bullish or bearish. Traders often use sentiment analysis in combination with tools like technical or fundamental analysis in order to help guide investment decisions.
Market sentiment essentially is a measurement of the current market temperature that is viewed through the eyes of the investors. Paying attention to the stock market insights can help people to become more informed investors. Market sentiment is generally discussed in terms of whether the market mood around trading stocks and other assets is “bearish” or “bullish”. Bearish sentiment indicates pessimism among investors. It is marked by a period of declining stock prices, and generally occurs when the price of an index drops by 20% or more over at least a two-month period. On the other hand, bullish sentiment suggests that investors are optimistic, even with the rising prices. A bull market usually happens when the price of an index rises by 20% or more over at least a two-month period.
Kavan Choksi / カヴァン・ チョクシ mentions that market sentiment does not necessarily indicate whether a specific investment is a good or bad one. Nor can it help accurately predict which way stock prices shall move. Rather, it is a tool for understanding how investor psychology impacts market movements. Market sentiment is measured using a variety of indicators. An indicator basically is a mathematical model that uses market data for identifying patterns or trends in price movements, which might be used when trading online or through a brokerage.
Use of the CBOE Volatility Index (VIX) or “Fear Index” is quite popular. This index measures the 30-day expected volatility of the United States stock market on the basis of real-time prices for S&P 500 Index options. The VIX essentially is a forward-looking indicator that measures the future implied volatility. Implied volatility means how much the market expects the price of a certain stock or security to swing over a set period. Whether the VIX, or Fear Index, is high or low provides valuable insights into how investors are thinking in the short term.
- When the VIX is high, implied volatility is high, and projected price swings ideally move across a broader range.
- When the VIX is low, implied volatility is low, and therefore projected price swings ideally move across a narrower range.
The VIX helps investors to efficiently gauge market moods and identify short-term trading opportunities.
