What is market sentiment and what does it tell us about the market?

In the long-term, valuations and fundamentals drive stock prices but in the short term, it’s all about market sentiment.

Market sentiment is the general mood among investors — (i.e. bearish or bullish) — and right now, the market is in a state of fear.

How can you tell sentiment? One simple way is to use CNN’s Fear & Greed Index, which tracks market sentiment on a scale of 0-100.

• When the index is low, it’s a sign investors are fearful.
• When the index is high, investors are optimistic.

Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful”. By that logic, the opposite of this metric could be a  buy/sell signal.

But always selling when the index is high could lead to missed returns if stocks continue running.  Consider using the index as a factor in timing market purchases.

• With the index hitting a level of 18 — signaling extreme fear — this could be a favorable time to “buy the dip”.

Where do we see sentiment changing? The oil market. In the past 8 months, oil prices had a massive run — driven by expectations of higher travel demand and low oil supply.

• But over the weekend, major oil producers finally reached an agreement to increase oil production — sending oil prices and oil stocks crashing.

Investors: With the oil supply narrative taking over, oil’s market sentiment may have shifted towards a bearish tone. Time to look elsewhere for gains.