Crowd sentiment, or investor sentiment, or market sentiment, refers to the tone of a market (crowd psychology). It is ultimately shown by the price movement of securities. For example, rising prices reflect bullish market sentiment and falling prices reflect bearish sentiment.

Sentiment Indicators are designed to gauge the attitude and tone of investors. Sentiment indicators are used to quantify the level or pessimism or optimism about the future direction of the stock market. Some indicators are based on other market factors like the Put/Call ratio. Some indicators are created by taking an actual poll of investors. Either way, investor sentiment indicators are contrary indicators, or countertrend indicators. When investor optimism or pessimism is at an extreme, it's a strong indication to do the opposite. For example, in October 2007 at the most recent stock market peak, investor sentiment was very optimistic. After all, it was the fifth year of a rising stock market. Investors tend to project the recent past into the future. But in March 2009, investor sentiment readings recorded some of the most extreme pessimistic levels ever recorded. After a -56% decline in the S&P 500 stock index from October 2007, investors again projected that waterfall to continue. From March 2009 through March 2010, that same index had gained nearly 70%. Although you wouldn't necessarily use this indicator alone in attempt to pick a top or bottom, clearly when the crowd is at the panic state or in a state of euphoria, these extremes tend to mark a change of trend. This is at least true in hindsight. We will note that, when investors are extremely fearful about the market as they were in March 2009, the same was true long before the low was made. In addition, when fear is at an extreme, that doesn't necessarily mean one can tolerate the potential risk at the lowest low. That is, when selling pressure is strong enough to push prices to such a low, you don't know until after the fact what "the low" is. For example, you may have not yet seen it.

At Shell Capital, we have specific things we find useful about these sentiment indicators. When investor optimism is at the high point that has historically resulted in a short term peak in prices, and a reversal, that is the point of highest risk. That is, just when most investors are feeling really optimistic about future stocks prices and the majority of them have piled on, that’s about the time the prevailing trend changes. By the time a high level of excitement is at historical highs the last buyers have entered and most of the gains have made.

We do not, however, use sentiment measures as a trading signal, but instead, as a warning signal or as confirmation of price based signals. It allows us to quantify “How do we define overly optimistic” with the answer: When the indicator is at the same extreme level that has historically led to a reversal in prices. Other than that, we go with the flow of the prevailing price trend until it changes, and when we see these extreme measures of inventor psychology then we know not to be surprised if the trend changes soon. Extreme levels are a extra "setup" for us to take notice and prepare to reverse position. We also know that low readings (extreme bearishness) have been associated with better than average price increase in the S&P 500, while high readings (extreme bullishness) have been associated with declines or at least little positive change.

Our sentiment indicator is designed to highlight shorter term (more recent) swings in investor psychology; optimistic (bearish) about the market’s direction or pessimistic (bearish). The composite is based seven different individual sentiment indicators in order to represent the psychology of a wide range of investors.

"...a good contrarian indicator: When sentiment reaches extremes it’s usually a good idea to bet against the crowd, and with the minority."

Below are examples of investors sentiment surveys that are created by a poll.

Investors Intelligence Advisors Sentiment survey tracks the views of over 100 independent investment advisory newsletters, aiming to identify the peaks and troughs of optimism and pessimism that so often accompany market bottoms and tops. This study has been widely adopted by the investment community as a contrarian indicator. Since its inception in 1963, our indicator has been a consistent record for predicting the major market turning points.

AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII Membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

AAII members are asked to complete this sentence: I feel that the direction of the stock market over the next 6 months will be: Bearish, Neutral, or Bullish.