What is the Market Mood Index and How Can Investors Use it?

Posted in Investment By Sajhyadri Chattopadhyay - Feb 6,2023
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“Be fearful when others are greedy & greedy when others are fearful” – Warren Buffett

As you are rushing about, getting ready for office on a Monday morning, your phone pings a notification alert. You see a prediction from some leading market analysing firm that investors are predicted to be selling in NSE’s Nifty 50. What do you do in such a scenario? Do you decide to go against the tide and instead buy stocks? Surely that is a possibility, you don’t need to sell off just because everyone is.  

In fact, you can find an opportunity to buy cheap in such times. However, you need to remember that your profits may take a hit during intraday trade, due to uncertain market trends. So how to make this decision? A coin toss is not the way, instead, you have to be a good judge of the market sentiment. This is where a useful tool known as the market mood index (MMI) finds due importance.  

“How Are You Feeling?”

No, you can never ask the market this and expect a tangible answer. Instead, you need to understand the prevalent sentiment. The mood and attitude of investors regarding a certain stock or sector make up the market mood. Simply speaking, it is the cumulative public opinion that creates the larger market psychology. These public sentiments originate from multiple external factors such as management behaviour, policy changes, and other macroeconomic influences.  

This market sentiment or mood can potentially impact stock prices both positively and negatively. Market mood index gives you a comprehensive understanding of this wider market sentiment and helps you decide your investment actions. It can lead to heavy losses if you cannot decide on the correct time to buy or sell. Conversely, the MMI can also tell you the best time to enter or exit the market. Hence it is one of the most important market-linked tools available.  

What is MMI?

Market Mood Index is the indicator of market sentiments which shows you the ongoing market situation. It examines the market trends and predicts the direction of the market. MMI is divided into four parts. Each of these determines if the time is suitable for booking your profit or further investing . Usually, the market is driven by two emotions– fear and greed. The underlying logic is that excessive fear among investors drives down the share prices, while too much greed conversely drives up the market.  

Suppose a stock is performing well in a bullish market and its share price goes up to ₹100 from ₹50. Seeing this profitable opportunity, you immediately invest ₹1000 and buy ten stocks. However, the same stock starts to show a downward trend soon. But you continue to hold on to it, hoping that it will rise again but it continues to fall. Fear of incurring higher losses leads you to sell out at ₹60 per share. This means that you lost ₹40 per share by investing in a bullish market. MMI would have indicated the market sentiment and warned you of the correct action at the correct time.  

Components of MMI

The market mood index is divided into 5 ranges. Each fall in a certain range of value out of 100, and represents a certain emotion –  

  • Extreme Fear (0 – 29)

This indicates an excellent time to invest in new positions. It means that the market is expected to be oversold, followed by chances of a rise. As every investor and trader is selling, it tells that they are very afraid to put money into the market. But this makes it a great time for new market investments. 

  • Fear (30 – 49)  

This shows us that investors are worried about the market. Still the correct course of action is hard to decide as it depends on the MMI’s past and future direction. If it dropped to Fear from Greed, it hints that the market is becoming more afraid. Moreover, investors should wait to see if the index goes down to Extreme Fear to see market uptrends.  

  • Neutral (50)

The MMI is said to be neutral, i.e., in the middle of the index range, when the indicators are neither predicting further market gains nor losses. 

  • Greed (51 – 70)  

This suggests that market investors are acting against the trend, but the MMI trajectory is yet to determine the appropriate course of action. If MMI moved to Greed from a Neutral stage, it tells us that the market is turning more greedy. If MMI fell from Extreme Greed, it suggests that the market greed is falling.  

  • Extreme Greed (71 – 100)

It indicates that markets are likely to fall as they are overbought. You should avoid investing in new positions if the MMI is above 70. New investments in any stock, in fact, the overall index, is a bad idea during extreme greed. Prices are already high so investing in any stock will cost you more than usual at such times.  

What Influences the MMI?

1. FII Activity

This is the total open interest of FIIs in the NSE’s Index Futures. Tracking the movement using this indicator provides insight into FII’s market opinions.  

2. Volatility and Skew

Measured using the India VIX index, it denotes the implied volatility of Nifty50 options for a month. Skew shows the difference between the out-of-money (OTM) call options under Nifty50 and OTM put options’ implied volatilities.  

3. Momentum

It is calculated as the difference between Nifty50’s exponential moving averages of 90D & 30D, divided by the moving average of 90D.  

4. Market Breadth

It is obtained by dividing the Advance-Decline (AD) Ratio by the AD Volume.  

5. Price Strength

It is the difference between the percentage of stocks close to their 52-week-lows and the percentage of stocks close to their 52-week highs.  

6. Gold Demand

This tells us the relative return of gold prices against Nifty50 for the preceding two weeks.  

MMI: An Investor’s Guide

MMI is useful as an index of market sentiments; however, you should not decide to buy or sell stocks simply based on the MMI’s current value. Instead, start your market journey first and use the market mood index to decide the best time to either invest or close on your current position. Selling or buying a stock is comparatively simple. It is the background research that takes up long hours.  

As an investor, you can’t risk playing a blind game with your hard-earned money. Hence you should always use this investing tool to better understand and predict the upcoming market fluctuations and the underlying logic. Analyse the chosen stock, go through its long-term market behaviour, and decide on the correct market-linked action to earn the best returns.  If you would rather start off with some safer investment option, then explore mutual funds on Bajaj Markets!

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