Market sentiment = how investors collectively feel about future prices. Pure emotion. Ignore fundamentals completely. When everyone panics, stocks crash regardless of strong earnings. When everyone greeds out, stocks soar regardless of weak earnings. Sentiment dominates short-term trading.
Bullish sentiment = optimism, buying, rising prices. Bearish sentiment = fear, selling, falling prices. That’s it.
The reality nobody discusses about market sentiment: sentiment drives 70%+ of intraday moves. Fundamentals matter eventually—but sentiment matters immediately. That’s why stocks rally on earnings misses and crash on earnings beats.
How to Actually Measure It
VIX (Fear Index) tracks expected volatility over the next 30 days.
- Below 12 = complacency, greed
- 15-20 = normal
- Above 30 = peak fear
- Readings below 12 preceded crashes—complacency kills
Fear and Greed Index: 0-25 Extreme Fear to 75-100 Extreme Greed
Put-Call Ratio divides put options volume by call options volume.
- Below 0.72 = extreme greed, overbought
- Above 1.23 = extreme fear, oversold
- CBOE averaged 0.97 from 2007-2022
Fear & Greed Index (0-100 scale) combines seven indicators:
- 0-25: Extreme Fear (buying opportunity)
- 26-49: Fear (caution)
- 50-74: Greed (risk increasing)
- 75-100: Extreme Greed (watch for crashes)
Sentiment Measurement Tools: VIX, Put-Call Ratio, Bullish Percent Index
Bullish Percent Index measures % of stocks with bullish patterns:
- Below 30 = oversold, bearish
- 50 = neutral
- Above 70 = extreme optimism, watch for pullbacks
The Psychology Driving It
Warren Buffett nailed it: “Be fearful when others are greedy, and greedy when others are fearful”. This works because extremes mean most traders are already positioned.
When Fear & Greed Index hits extreme greed (75+), everyone’s already bought. No more buyers left—price collapses. When extreme fear hits (below 25), everyone is already sold. No more sellers—price bounces.
Most traders get this backwards, buying extreme greed and selling extreme fear—maximum losses.
Contrarian Signals That Work
Retail investors become overwhelmingly bullish before crashes. AAII bullish sentiment above 50% for multiple weeks historically preceded short-term peaks. Conversely, bearish readings above 50% often marked bottoms.
Professional money manager exposure (NAAIM Index) above 100% signals dangerous complacency. Below 30%? Maximum fear creating contrarian buy opportunities.
Real Examples
March 2020 COVID panic pushed VIX over 80—extreme fear. Investors screaming “market’s done!” Those staying calm bought at 50% discounts. Within 12 months they gained 40%+.
May 2021 showed Fear & Greed at 89—extreme greed. Tech stocks crashed hard weeks later.
The Trader’s Edge
Combine multiple sentiment indicators. One indicator misleads; seven aligned indicators tell the truth.
When VIX spikes above 30 and put-call ratio exceeds 1.23 and Fear & Greed below 20—that’s maximum fear creating massive buying opportunity.
Never trade sentiment alone. Pair it with support-resistance, moving averages, volume confirmation. Sentiment + technicals = money.
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