Sentiment Indicators: When Should You Go Against the Crowd?

Sentiment indicators help you recognise those pressures. For a long-term investor, their most useful job is to prompt a considered portfolio review when the market’s mood becomes unusually one-sided. They can’t reliably tell you the best day to buy or sell.

Investor sentiment describes how optimistic or pessimistic investors feel about the market. Sentiment indicators put numbers around that mood, using surveys or evidence from trading and investment activity.

Some ask investors what they expect. Others examine how much exposure investors have to shares, or what they’re paying for protection against market falls.

These will consider the bullish, meaning investors expect prices to rise, and bearish views, meaning they expect prices to fall.

The distinction between opinion and behaviour matters. Someone can tell a survey they’re worried while keeping almost all their money invested.

The indicators below provide a useful starting point. The US measures offer context for UK investors with global funds. For market breadth, choose data covering the index or market you want to assess.

For a first look, start with CNN and AAII. CNN summarises market behaviour, while AAII adds investors’ stated opinions. CNN explains its seven components in its methodology notes.

AAII’s bull–bear spread subtracts the bearish percentage from the bullish percentage. Suppose 25% are bullish and 50% bearish: the spread is minus 25 percentage points. Track that against its history; zero simply means the two groups are equal.

The VIX measures the size of expected fluctuations, not their direction: for example a reading of 30 doesn’t forecast a 30% market fall.

Put/call ratios also need context. Puts give their holders a right to sell; calls give a right to buy. Investors use both in different strategies, so a high ratio doesn’t prove everyone expects a crash. Compare the same series over time, because equity and index options serve different purposes.

A handful of large companies can lift an index while many of its shares struggle. Breadth measures actual participation, adding evidence to surveys of investor mood.

Advance/Decline line: a running total of the number of shares rising each day minus those falling. If the index reaches a new high while this line weakens, fewer shares may be supporting the advance. Advance/Decline guide.

Percentage above 50- and 200-day moving averages: measures how many shares trade above their own average price over the previous 50 or 200 trading days. The 50-day measure shows shorter-term strength; the 200-day measure gives a longer-term view. A rising percentage suggests participation is improving. Moving-average breadth guide.

New highs and lows: compares how many shares reach new 52-week highs with those reaching new 52-week lows. Increasing new lows can expose weakness that the headline index disguises.

McClellan Oscillator and Summation Index: both use advancing and declining shares. The Oscillator measures changes in breadth momentum; the Summation Index accumulates its daily readings to show the broader trend. McClellan’s explanation.

How to use breadth: look for agreement between the index and its underlying shares. Rising prices with improving breadth suggest wider support. A rising index with weakening breadth warrants a closer review, although that gap can persist. Strong breadth can confirm a continuing rally, so it isn’t automatically a reason to take the opposite view.

Composite & proprietary dashboards

Dashboards bring several measures together, making it easier to compare sentiment with market trends and breadth. Some also calculate their own scores.

These services measure different things. A news-based score reflects the tone of selected coverage; a survey records respondents’ views, while trading data records market activity. Their scores aren’t directly interchangeable, even when each uses a scale of 0 to 100. Check the methodology and observation date alongside the headline reading.

A contrarian investor questions an unusually popular view.

If investors have become deeply pessimistic and already reduced their holdings, prices may reflect a great deal of bad news. An outcome that proves less damaging than expected can then support a recovery.

Excessive optimism creates the opposite risk. When prices depend on everything going well, even decent company results can disappoint.

The investment opportunity depends on the gap between expectations and reality. An unpopular investment still needs a convincing case at its current price.

A contrarian investor questions an unusually popular view.

If investors have become deeply pessimistic and already reduced their holdings, prices may reflect a great deal of bad news. An outcome that proves less damaging than expected can then support a recovery.

Excessive optimism creates the opposite risk. When prices depend on everything going well, even decent company results can disappoint.

The investment opportunity depends on the gap between expectations and reality. An unpopular investment still needs a convincing case at its current price.

Research supports taking sentiment seriously, but the results depend on what you measure. In their 2006 study, Malcolm Baker and Jeffrey Wurgler found that sentiment had a stronger relationship with subsequent returns for difficult-to-value shares, including smaller and unprofitable companies. Those shares tended to perform relatively better following low sentiment and worse following high sentiment. This doesn’t establish a trading rule for a diversified portfolio. Baker and Wurgler’s research.

AAII’s Charles Rotblut reached a more specific conclusion in a 2013 analysis of its survey history: extremely low bullishness had worked better as a contrary signal than very high bearishness, which produced mixed results. His study used overlapping six- and 12-month periods and excluded trading costs. Those limitations matter when interpreting the findings. AAII: Is the survey a contrarian indicator?.

For further academic reading, start with Baker and Wurgler’s Investor Sentiment in the Stock Market (2007), which explains how researchers measure sentiment and why betting against the crowd can be costly. Greenwood and Shleifer’s Expectations of Returns and Expected Returns (2014) compares six survey measures and finds that investors’ optimism tended to follow market rises, while model-based estimates of expected returns moved in the opposite direction. For a connection to news-based dashboards, Tetlock’s Giving Content to Investor Sentiment: The Role of Media in the Stock Market (2007) examines a Wall Street Journal column and finds that pessimistic language predicted downward pressure on prices followed by a reversal. 

Two real episodes show why timing remains difficult:

March 2009: AAII bearish sentiment reached 70.3% on 5 March, just days before the financial-crisis bear market ended. Buying amid that pessimism would have meant investing while the news still looked dreadful. AAII’s historical analysis.

April 2022: Bearish sentiment reached 59.4%, its highest reading since March 2009. Yet the S&P 500 didn’t reach its closing low for that market cycle until 12 October. Extreme fear arrived months before the bottom. AAII’s April 2022 survey, market-cycle dates.

An extreme reading should trigger a closer look. A portfolio decision needs more evidence.

The following are illustrative review prompts, rather than tested buy-and-sell rules:

Check several sources, while allowing for overlap. CNN already includes the VIX and put/call activity, and other dashboards may display these same measures. Seeing one reading on several websites doesn’t provide independent confirmation of the conclusion.

Then connect the evidence to your own plan:

Check what has changed underneath the mood. Falling profits or deteriorating finances can justify lower prices. Widespread fear alone doesn’t make an investment cheap.

Review your investment mix. Compare today’s holdings with your intended allocation. Strong markets can leave you taking more risk than planned, while falls can leave you below your target exposure to shares.

Protect money you need to spend. Your withdrawal plans and ability to absorb further losses determine whether adding to investments is sensible.

Make a measured adjustment if the plan calls for it. Rebalancing or directing new contributions towards an underweight investment can be enough. Allow for dealing costs and any tax consequences.

Suppose your chosen allocation is 60% shares, with a review whenever that proportion moves outside 55–65%. A fall takes it to 52% while sentiment becomes fearful. If your circumstances and investment case remain sound, rebalancing towards your target may make sense. Following a strong rally, a 70% share allocation would prompt the opposite review.

These percentages illustrate a process; they aren’t a recommended allocation. The reason to act comes from your agreed plan, with sentiment providing context. If your portfolio still fits, leaving it alone is a valid decision.