Can I, and how can I know what the market is thinking?
The answer to the first part of the question in the title is yes. As to the how, there is a tool called “Market Mood Index”. It looks like this.
The Market Mood Index or MMI, gauges the activity and price movement of the securities traded in a market, as well as the psychological state of its participants. It is broken down into 4 sections that make it easier to decide whether it's best to invest in the index or book profits. These 4 sections are:
Extreme Fear (MMI < 20)
This section signifies that the market may be considerably oversold and it can be a good time to open new positions.
Fear (20 < MMI < 50)
This section signifies that participants are concerned about the market’s strength. Now this is tricky because you have to check for the direction the pointer is moving in. If it drops from Greed to Fear, the market is becoming more fearful and it may even drop to Extreme Fear and then turn upwards. Similarly, it could be coming up from the Extreme Fear section and indicate rising confidence in the market.
Greed (50 < MMI < 80)
This section signifies that participants may be starting to act irrationally in the quest for more and more returns. This part is also tricky since you have to keep in mind from which section the pointer is coming.
Extreme Greed (MMI > 80)
This section signifies that the market may be very overbought and you could consider exiting open positions and not opening new ones.
You can visit this site to check out the MMI built by Tickertape. They take factors like FII activity, volatility, momentum and demand for gold into account while creating this tool.
Now a word of caution, this tool should not be used as a standalone indicator for your buying or selling decisions. The market could be rising for 1 month straight and the indicator could be shifting between Greed and Extreme Greed for that whole time. The indicator is also not instantaneous, it takes time to get updated.
This tool can be used to know the mood of the overall market to supplement your buying or selling decision so that you can time the market better. Selling when there is greed and buying when there is fear is a very good strategy in the financial markets.
Check it out here.
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