One of the most common terms used to describe the movements in the share market is market sentiments. What are market sentiments? How do they impact the investment decisions that traders and investors take?
Market sentiment is the attitude of the investors towards the market. By an investors’ attitude, it means the collective bunch of investors who buy and sell in the market. If the market sentiment is bearish, the investors expect the share market to correct itself and for prices to reduce. If the market sentiment is bullish, it means the investors expect a rise in the prices and for the market to grow. Another term popularly used with the sentiment of share market live is crowd psychology.
The key to identifying the share market’s sentiments is to put the finger on the market’s mood. If the market is dampened because of drastic financial news, the sentiments will be bearish, and the markets will be experiencing a downturn. For example, Sensex and Nifty tanked almost 10% in September and October following news of IL&FS’s potential default. This was compounded by fears of a trade war between China and the USA. This bearish market sentiment pulled down the indexes, and investors pulled out their funds, especially from the debt markets. This led to a massive selloff in mid caps and small caps, leading to a heavy correction and investor wealth loss.
Sentiment analysis usually looks at a short term horizon. The share market lives sentiments are used to make decisions that will impact a week, or two weeks or maybe even a month. Since market trends change dynamically in response to global news, the economy’s performance, market sentiments change quite often. This makes them a useful tool to use for short term investment decisions. If the investment horizon is for the medium to long term, then the market sentiments of a particular month or week do not impact these decisions. Long term investors analyze their portfolios less regularly than short term traders.
Some factors affecting market sentiments:
These factors affect the sentiments of the market:
- Company news and results
- Performance of the economy
- Political events across the world
- Investment decisions are taken by foreign investors
- Market trends and performance of the market
- Prices of shares
- The volume of shares traded
Tools used by investors to understand market sentiments:
There are several tools that investors use to put their finger on the sentiments of the share market.
- Volatility indices
- Shares advancing versus shares declining
- Shares that have only buyers versus shares that have only sellers
- Number of shares that are at their 52 week highs and those that are at their 52 week lows
- Survey based sentiment indices
- Headlines and major economic news
Sentiment analysis uses points from both fundamental analysis and technical analysis to arrive at a conclusion.
But remember, the first essential to trading in the share market is to have a demat account. Open a Demat account with a depository participant like Kotak Securities to ensure all your trades are carried out seamlessly. You also have a huge knowledgebase to improve your knowledge from.
At the end of the day, Sentiment analysis is a tool to help you make better investment decisions. Coupled with market trend analysis, you can make good investment decisions that turn out profit and align with the market’s movements.