by Altaf Sahibzada

Created on: April 22, 2009   Last Updated: June 10, 2009

Most of us have heard the term "market sentiment". Most importantly we associate it with stock and forex markets. Instead of talking about fundamentals of a company or market, we generally talk about market sentiment.

Market Sentiment Vs Fundamentals

Many times we do not see any relation between market movements and underlying fundamentals of a company. There is no logic. When we expect the market to go up because of certain factors, it goes the opposite way. There does not seem to be any relation between logic and market movement.

We also see that many companies or economies have very good prospects, but not many buyers. Some companies at the same time enjoy highly unjustified prices. There is hype and there is suspense.

What Drives Market Sentiment

We also often hear the phrase "herd mentality". This starts when a bunch of investors starts pushing up the prices in a certain direction and then the others seeing the movement jump in. This way a particular activity gets reinforced and the trend continues some time when the reverse movement gets started and general investors walk in.

The two most important factors governing the trading markets are greed and fear. Because of these, traders generally take the prices to illogical lengths regardless of the fundamentals of a stock. We often refer to PEO ratio. Why some stocks enjoy astronomical ratios while others remain oblivious and undervalued. Obviously it is the perception of the investing public. Popularity of a stock attracts hordes of investors. That is the element of greed.

If there is a downward pressure in the stock price movement, many traders also start selling for fear of further losses. So fear is the governing factor here.

Expectations and actual news are the other sentiments bearing heavily on the markets. That is why professionals advice to buy on anticipation of news and to sell on actual news. Many savvy investors put it the other way i.e. buy the rumor and sell the news.

Thinking of investors also means a lot in any market. The way people think is going to happen in the market. Many times when the sentiment gets bullish, likelihood is that the markets will start tumbling and vice versa.

What is The Evidence?

There are no set rules governing the behavior of markets. Markets have their own rules. With so many players present in the market, it is generally hard to predict its direction.

People pursue various methodologies in order to predict the sentiment of a market and the price movement. The two most important

• 1
• 2
• Next Page >>