Sentiment Indicators

Sentiment indicators focus on investor expectations or their degree of bullishness or bearishness about a particular stock or stock index. At first, it might seem that if a sentiment indicator implied that investors were bullish about a stock, it would be an excellent time to buy it. Sentiment indicators are almost always used as contrarian indicators.

A contrarian indicator suggests buying a stock when most investors are bearish and selling a stock when most investors are bullish. In other words, if most investors feel strongly that prices will rise, contrarian investor behaves as if they will fall. The rationale is that if most investors feel that prices will rise, they probably own the stock already, so not enough is left to push prices significantly higher.

Contrarian indicators are usually used as corroborating evidence to support other technical indicators. Various tools can measure overall market sentiment, including the put/call ratio and public short ratio.