Sentiment Indicators

Sentiment indicators monitor the actions or emotions of different market participants move from one extreme at a bear market bottom to another at a bull market top.

Sentiment or expectation indicators monitor the actions of different market participants, such as insiders, mutual funds managers and investors, and specialists. Just as the pendulum of a clock continually moves from one (extreme to another, so the sentiment indexes which monitor the emotions of investors) move from one extreme at a bear market bottom to another at a bull market top.

The assumption on which these indicators are based is that different groups of investors are consistent in their actions at major market turning points. For example, insiders (that is, key employees or major stocksholders of a company) and New York Stocks Exchange (NYSE) members as a group have a tendency to be correct at market turning points; in aggregate, their transactions are on the buy side toward market bottoms and on the sell side toward tops.

Conversely, advisory services as a group are often wrong at market turning points, since they consistently become bullish at market tops and bear­ish at market troughs. Indexes derived from such data show that certain readings have historically corresponded to market tops, while others have been associated with market bottoms. Since the consensus or majority opin­ion is normally wrong at market turning points, these indicators of market psychology are a useful basis from which to form a contrary opinion.