Measuring Expectations That Drive Markets

Sentiment is the term used for the summation of all market expectations. It ranges from fear and hopelessness to indifference to greed and complacency. At the bottom of a bear market, the expectations of market participants are almost unanimous for lower prices and more financial losses. As a rally begins, some of these participants become hopeful and prices rise off their worst levels. In the middle of the bull market, many players have changed their expectations, but not everyone is bullish.

Near the end of the rally, almost everyone is assuming that the trend will continue. More risks are taken and greed becomes dominant, as evidenced in the initial public offering (IPO) frenzy in 2000 or the emergence ...

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