Probably the most important factor in the market is the ‘sentiment’ among its participants.
What does market sentiment mean? How does it make a difference to the market?
Answers to the above questions and a lot more in this article. Do read it till the end.
In the short term, it is the stock market sentiment which decides the direction of the market.
Sentiment is the feeling or mood among people – which makes them buy or sell their shares.
When the market is going down, there is fear all around and people tend to sell. This is negative sentiment.
When the market is going up, the general mood in that of comfort, happiness and greed. This makes people more willing to buy shares. You will hear analysts on business channels say, the sentiment is very positive.
If you have been in the market for the last 1-2 years, think about what has changed between March – April 2020 and March – April 2021?
In April 2020, most companies were available at throwaway prices.
Check out the difference in share prices from last year to this year:
That is a big difference. Almost all stocks listed in the stock market are 2-3 times more than the price last year.
Yet, people were selling their shares and getting out of the market in March and April last year. But people are willing to pay much higher prices, just a year later.
Have profits of companies doubled or tripled? Not really. In fact, businesses of many companies are shut or in trouble.
But people are more positive now, than they were last year.
What has changed? It is the sentiment that has changed.
When the market falls, people start doubting the business, there is a feeling of doom and gloom. That everything could be finished. This is exactly what people were feeling due to Covid last year. This made them sell their shares at very low prices, fearing the market could go down further.
When prices begin to rise, initially the sentiment remains mixed. Neither positive, nor negative. People are doubting the rise, expecting that it will fall again.
But as time passes and as markets begin to rise higher and higher – the sentiment begins to change.
This is how the sentiment moves:
Extremely negative > Still negative > Doubtful > Mixed emotions > Less confident > Hopeful > Positive > Extremely positive.
Until the cycle begins to move backwards again. Once in approximately 5-10 years, the market goes from extremely positive to extremely negative.
But most years, it’s somewhere in between. Hovering between positive to negative.
In a bull market, one negative day when the market falls – the sentiment can change from positive to less confident. A bigger fall can evoke mixed emotions – where people are not sure whether it is a buying opportunity or if the market will crash further and they should sell everything.
All of this happens because of the sentiment among people.
Sentiments can also be stock specific
Sentiments are not just at market level, but can also be stock specific.
If you have observed, everyone talks about fast-rising stocks. They all want to be a part of it and make money. Adani stocks are rising, they all want to know why it is rising and if they should buy it.
Bitcoin and other cryptocurrencies are rising. Should I buy? How high can it go? It looks like it will be the future.
It crashes for a couple of days. The questions change. Should I sell Bitcoin? What exactly are crypto currencies? How much debt does the Adani group have?
The direction of the price decides the market sentiment or stock-level sentiment.
The real questions are asked when the market sentiment turns negative. During happier times, nothing matters expect the rise in price. There lies the trap.