How to Read Market Sentiment (Fear/Greed)

Markets aren't driven by fundamentals alone — collective investor psychology plays a considerable role short term. Sentiment indices aim to capture this dominant emotional state, between fear and greed.

Components of a Sentiment Index

• Price momentum — how far indices trade from their reference moving averages.
• Put/call ratio — put vs call option volume, reflecting hedging demand.
• Safe-haven demand — relative behavior of gold and government bonds.
• Credit spreads — yield gap between risky and government debt.

Why Sentiment Works as a Contrarian Signal

Widespread extreme fear generally means most sellers willing to exit have already done so — leaving less potential selling pressure, making the market statistically more likely to bounce. Extreme greed reflects the opposite.

Limitations to Keep in Mind

Like any contrarian indicator, sentiment can sit at an extreme for an extended period before a reversal materializes, particularly during strongly established trends. It's a probabilistic context indicator, never a precise timing signal.