8. Sentiment Indicators

Sentiment is a reflection of how investors feel about the market. The classic interpretation of sentiment is that when investors are optimistic, the market is at a top, and vice versa when investors are pessimistic. But this is true only at market extremes. In between, sentiment can be contributory to the market direction. Bullishness can be a strong force generating higher prices—until there is too much bullishness. What is “too much?” That is what a good sentiment indicator system should tell us.

Generally, sentiment indicators come in two styles: the opinion style and the action style. The opinion style is derived from either surveys of opinion or composites of others opinions. The Advisory Opinion survey of Investors ...

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