2.8 - Sentiment analysis

Why is sentiment important?

Sentiment reflects the collective emotions of gamblers which can significantly influence market behaviour and price movements. Positive sentiment can drive buying pressure and negative sentiment can push price down.

By analysing sentiment, traders and investors can predict potential market turning points, identify overbought and oversold conditions.

Understanding the behaviour of RETAIL behaviour and their tendencies to crowd to one side of the market can provide valuable insights for making more informed trading decisions. When retail sentiment reach extremes and anticipating potential market reversals, traders can PREPARE more effectively (tighten a stop loss, heding)

Being on one side of the boat

When a majority of retail is bullish or bearish, the market often likes to move in the opposite direction. This can be due to when everyone is bullish, that means most of the buying pressure has already been used up and when everyone is bearish, that can mean most people have already sold or are down so bad they are ready to capitulate.

Smart money use these extremes as signals to take the opposite position.

TheVolatility VIXIndexes (VIX)

The VIX (Volatility index) reflects market sentiment. It is based on the S&P500 options market over the next 30 days.

Expresses as an annualised percentage. Low VIX = low volatility expected. High VIX = High volatility expected.

When the VIX peaks, this has often marked the bottom of the S&P500

Ticker	Measures Volatility of
VIX	S&P500 30d options implied volatility
XVI	AU200 30d options implied volatility
BVIV	BTC 30d options implied volatility

Sentiment Surveys

AAII is a survey of individual investors and can be used to find out the sentiment of investors

NAAIM represents the average exposure to US Equity markets reported their members