Examining stock market sentiment is an important tool to help investors assess risk. It doesn't give any indication of the future move in price, but it does give investors insight into the potential move in either direction. For example, stock market (NYSE: SPY) sentiment was very bullish early in the year.
Speculative, momentum stocks without any earnings or revenue were seeing massive gains like Virgin Space (Nasdaq: SPCE). There was an explosion of volume in short-dated call options. Greed was dominant over fear. With the coronavirus catalyst, stocks plunged, wiping out gains from the past three years.
At the lows in March, the opposite dynamic took hold. Stocks were opening limit-down for multiple days in a row. The scope of the coronavirus was unclear, including the extent of a shutdown necessary to combat it. This led to fear being the dominant emotion. Short positions increased, and long positions were liquidated which created the conditions for a powerful, counter-trend rally which has gone further than many believed.
At the March lows, sentiment hit extreme bearishness on multiple timeframes. Today, sentiment is neutral on an intermediate and longer-term timeframe, while it's reached excessively bullish levels on a shorter timeframe. This is clear with the CNN Fear/Greed Index which is in the mid-40s. At the beginning of the y...