<p>Market sentiment describes the collective attitude of investors toward a particular market or asset class. It reflects whether participants are generally optimistic, pessimistic, or neutral about future price movements. Sentiment is not a hard data point but a gauge of mood that can influence buying and selling decisions.</p>

<h2>How It Works</h2>
<p>Investors form sentiment from a mix of news, economic data, price trends, and social cues. Surveys, volatility indexes, and put‑call ratios are common tools used to quantify the mood. When optimism rises, buying pressure tends to push prices higher; when fear spreads, selling pressure can drive prices lower.</p>
<p>Key indicators include:</p>
<ul>
<li>The Fear‑and‑Greed Index, which combines seven market factors into a 0‑100 score.</li>
<li>The AAII Sentiment Survey, showing percentages of bullish, bearish, and neutral respondents.</li>
<li>The VIX, often called the “fear gauge,” measuring expected volatility in the S&P 500.</li>
<li>Put‑call ratio, which compares the volume of put options to call options to gauge fear or complacency.</li>
</ul>
<p>These metrics are updated frequently and can be plotted alongside price charts to spot divergences. For instance, a rising market accompanied by a declining Fear‑and‑Greed Index may signal weakening momentum despite higher prices.</p>

<h3>Using Sentiment in Trading</h3>
<p>Traders often look for extreme readings as contrarian signals. A Fear‑and‑Greed Index below 20 suggests excessive fear, which can precede a bounce. Conversely, a reading above 80 indicates extreme greed, often warning of a potential pullback. Combining these signals with trend analysis helps filter false signals.</p>

<h2>Why It Matters</h2>
<p>Understanding sentiment helps traders anticipate short‑term moves that may not be justified by fundamentals alone. For example, during the March 2020 COVID‑19 shock, extreme fear pushed the VIX above 80, yet markets rebounded sharply once sentiment shifted to cautious optimism. Recognizing such extremes can signal potential reversals or continuation patterns.</p>
<p>By combining sentiment analysis with fundamental and technical analysis, investors can better time entries, manage risk, and avoid herd‑driven mistakes. Sentiment thus serves as a complementary layer that enriches decision‑making in both volatile and stable markets.</p>