The market mood simply refers to the overall attitude or feeling of investors in the stock market. If people are confident, they tend to buy more, which in turn pushes prices up. If they are nervous, they sell or hold back, causing prices to fall. This mood is often driven more by emotions, such as fear and greed, than by facts or news.
Let’s understand how you can gauge the overall market sentiment.
Different Ways to Gauge the Market Mood
You can use any of the following methods to determine the market mood:
Fear and Greed Index
The Fear and Greed Index combines volatility, momentum, demand for safe assets, and junk bond strength to gauge investor sentiment. A reading close to 0 indicates high fear, while a reading near 100 indicates extreme greed.
If the market is extremely speculative, exercise caution. If the market is characterised by widespread fear, it may present a favourable buying opportunity.
Volatility Index
Observe the Volatility Index, also known as VIX. It measures the expected volatility in the market over the next 30 days. A rising VIX indicates increased fear or panic among investors, suggesting a bearish market sentiment.
However, do not just look at the number; observe the rate at which it changes on a daily basis. If the index spikes suddenly, it often reflects heightened investor anxiety or uncertainty over market direction. You can also use the Nifty 50 heatmap. It gives you an idea of the overall market and which stocks are winning or losing.
Advance-Decline Ratio
Look at how many stocks are advancing versus how many are declining on a particular trading day. This is called the Advance-Decline Ratio. If more stocks are gaining than falling, it shows broad market participation and positive sentiment.
It is important that you check this across sectors on stock screeners and not just a single index. This provides a clearer understanding of whether optimism or pessimism is spreading across the market or is confined to a few sectors.
Market Breadth
Market breadth refers to the overall strength of the market, measured by the number of stocks advancing and declining. Unlike the advance-decline ratio, this method focuses on the volume traded.
If rising stocks have higher volumes than falling ones, it reflects confidence. Weak volume in rising stocks shows a lack of conviction. Pay attention to whether heavyweight stocks are moving the index alone, or if most stocks are participating.
FII and DII Activity
Foreign institutional investors (FIIs) and domestic institutional investors (DIIs) are key players in the market. Assess market mood by tracking their daily net buying or selling. If FIIs are aggressively selling, it usually creates panic or caution in the market.
When DIIs are consistently buying, it may indicate domestic confidence even during volatile global conditions. Always look at the volume of their trades, not just the buy or sell direction.
Momentum Indicator
Use a momentum indicator, such as the Relative Strength Index (RSI), which is a technical indicator that helps you determine whether a stock or index is overbought or oversold. If the RSI is above 70, it indicates that the asset is overbought and may face selling pressure.
A reading below 30 indicates oversold conditions, which may present a buying opportunity. Use the RSI for major indices, such as the Nifty 50 or Sensex, to gain a broad sense of the market mood. A market where many stocks have high RSI shows aggressive buying, while low RSI levels across the board reflect caution.
Candlestick Patterns
Candlestick patterns on charts help you decode trader psychology. A “Doji” indicates indecision, “Hammer” suggests a potential reversal from bearish to bullish, and a “Shooting Star” often signals a bearish reversal.
You must study these patterns on daily or weekly charts of indices, such as Nifty or Bank Nifty, to sense the overall mood. Do not just depend on one-day formations. Look for continuation or reversal signals through a combination of candles.
Conclusion
Understanding the market mood does not have to be complex. By combining tools such as the Fear and Greed Index, VIX, advance-decline data, market breadth, FII/DII activity, RSI, and candlestick patterns, you gain a clearer picture of investor sentiment. These indicators, when used together, help you decide when to act cautiously and when to spot opportunities.
