I mentioned in one of my previous articles that Market Sentiment Indicators and Technical Indicators are entirely different. While they can work collaboratively to achieve the best results, don’t mistake them for one another.
This article comprehensively reviews the best market sentiment indicators you’ll find really helpful as a sentiment trader. So, without further ado, let’s dive right in!
First, What Are Sentiment Indicators?
Sentiment indicators are tools used for measuring the overall feeling or mood among investors and traders. As the name suggests, they help you determine what trading actions or decisions to make.
Sentiment indicators examine several things, including social media posts, put and call options, safe haven demand, media mentions, etc.
However, note that these indicators differ from technical indicators. Unlike Technical indicators, sentiment indicators aren’t based on mathematical calculations. Instead, they are based on the mood in the market. Also, they are not based on a certain asset but on a broad market.
Top 8 Sentiment Indicators All Sentiment Traders Must Know
1. Social Media
Where else can you get real-time insights on traders’ sentiments if not on Social Media?
In 2013, a hacker hacked AP and reported that there was an explosion in the White House and that the president was injured. This news led to a significant market move in favor of the bears, even though it was not true.
Therefore, as a sentiment trader, you must look at social media before making any trading decision.
2. Volatility Index
Otherwise called Fear Index, VIX is a sentimental analysis tool that measures the amount of volatility in the financial market.
The VIX does this by measuring the amount of investor protection within the next 30 days. For instance, if there is major economic or financial news, chances are that the VIX figure will go up.
3. High/Low Sentiment Ratio
This indicator is highly recommended for racers focused on equities. It compares the number of stocks making their 52-day high and those making their 52-day low. If more stocks are in the high zone, it means that the market is bullish, and vice versa. As a sentiment trader, this information can help you make informed decisions.
4. NYSE Bullish Percentage (NBP)
NBP measures the percentage of companies with bullish patterns in the New York Stocks Exchange (NYSE). Normally, the percentage is in the range of 40 and 60%. When this number goes very high (>80%), it indicates an overbought market; below 20% indicates an oversold market.
5. Fear and Greed Index
The fear and greed index is typically used to show whether there is fear and greed in the financial market. The fear and greed index ranges between zero and 100. When it is close to zero, it indicates that the market is extremely fearful. A level close to 100 is a sign that the market is extremely greedy and is often a sign to sell.
6. Buffett Indicator
The Buffett indicator is usually associated with Warren Buffett. This indicator is a ratio of the US stock market valuation compared to the total GDP.
7. Commitment of Traders (COT)
The COT is a weekly report from the Commodity Futures Trading Commission (CFTC) showing the net long and short positions of speculative and commercial traders.
With this report, you can outline the market dynamics, detailing how the biggest traders are positioned in terms of futures and options and how committed they are to the current trends.
8. Put/Call Ratio
The Put/Call Ratio measures the number of put options (which expect the price to go down) divided by the number of call options (which expect the price to rise).
When the ratio falls below 1, this indicates that more call options are being placed, suggesting that more investors expect a bounce. If above 1, it means investors think the market may start to slow or fall.