Sentiment Indicators - Tools for Gauging Investor Beliefs

Sentiment Indicators Definition

Sentiment indicators are used to gauge how investors are perceiving the current health in the market outside of simple price activity. Traders will use a variety of tools and methods for assessing the sentiment of a given security. One method is to analyze the put/call spread on a security to gauge how traders are feeling about a stock. Traders will also use the premium of stock index futures relative to the price of the security itself to gauge investor sentiment. One unknown sentiment indicator is to track the current market views of investment newsletters. Many traders will wait for advisory services to all go extremely bearish or bullish, and then fade their signals. This method of trading works quite well, because if the majority of traders are thinking the same thing, odds are the supply demand forces in the market are imbalanced. Sentiment indicators are not an exact science; you will have to gauge which indicator to follow and depending on the current market environment, the respective indicator may or may not carry the same weight.