Market Sentiment: How It Is Measured and When It Is Already Priced In

Market sentiment analysis means reading not what participants say but what they have already done: where the money sits, at what price they are willing to part with a security, how broadly a move spreads across the market and what risk costs in neighbouring assets. Sentiment matters to a trader not as weather but as a clue to how much of the market's expectations has already been paid for in the price. So the practical question is this: what part of the crowd's optimism or fear is not yet reflected in the quote, and is there a tradable edge in that gap?

Sentiment is a position, not an opinion

Surveys and headlines describe sentiment on the cheap: a person can talk about fear and still hold a portfolio fully invested in equities. Positioning cannot lie. If participants really are frightened, it shows in the derivatives market, in a widening spread, in how quickly orders vanish at the first impulse. Hence the rule for reading it: trust the data that somebody paid for with money, and do not trust the data that cost the speaker nothing.

Technically, sentiment shows up in the structure of liquidity. When buyers are plentiful, the order book absorbs the blow and a large order barely moves the price. When sentiment has soured, the very same amount of money breaks the quote. It is useful to look at market depth and market liquidity as a gauge of sentiment rather than as a technical characteristic: an empty order book is fear in measurable form.

Where sentiment is visible on the Russian market

The Russian market offers several independent cross-sections, and the value appears when they diverge.

Breadth of the move. An index can rise on the strength of a small group of heavyweight stocks while the rest of the market stands still. Break the move down by industry on the sectors and securities page and compare it with the piece on how the sectors are built. Narrow growth is a sign of concentration, not of optimism.

The price of money. The OFZ yield curve is the most honest indicator of expectations for rates and for risk. Equities react to the rate later than debt does, which is why a divergence between debt-market and equity-market sentiment is often the tradable idea itself. It is also worth watching what the regulator is doing: its decisions and mandate set the backdrop, which sentiment only amplifies.

Parked money. An inflow into money market funds means that participants have stepped out of risk but stayed in the market and are ready to return. That is a fundamentally different mood from capitulation with money being withdrawn. More on this in the review of money market funds.

Reaction to an event. Not the fact of a report or a dividend in itself, but the nature of the response. Strong sentiment forgives a weak report; soured sentiment punishes a good one. Check against the events calendar and the nearest payouts: {{dividend_calendar|limit=5}}.

Valuation of an individual stock. A multiple is sentiment frozen in place for a specific issuer. Compare 3,77 with the stock's own history and with its industry; the instrument card: {{instrument:SBER}}.

Why extremes read better than the middle

Sentiment is informative in the tails of the distribution and useless in the centre. In the middle of the range it simply describes the current price, and reading it there amounts to retelling the quote. At the extremes an asymmetry appears: participants are all alike, there are almost no uncommitted buyers (or sellers) left, and any surprise hits in one direction. That is exactly why a contrarian reading of sentiment works rarely but pays off, while a trend-following reading works often and to no purpose.

Stocks are not equally sensitive to the general mood: a defensive name and a cyclical name live through one and the same wave differently. This is measured by beta — it is through beta that market sentiment turns into the movement of your portfolio.

What sentiment analysis cannot do

The second limitation is reflexivity. A popular indicator changes the behaviour of those who watch it and gradually stops working. The third is the temptation to fit an explanation to the facts: any market move can be labelled fear or greed in hindsight. It is the same trap that technical methods fall into, described in the piece on the limits of technical analysis; see also technical analysis and the efficient market hypothesis.

How to build this into a decision

• Step 1. State which sentiment you are testing and in which instrument. Without that, a set of indicators will produce analysis paralysis.
• Step 2. Gather independent cross-sections: breadth, debt, liquidity, flows into parking assets.
• Step 3. Describe the outcome for different paths of development — this is a job for scenario analysis, not for a forecast. Check how far the result depends on your assumptions: sensitivity analysis.
• Step 4. Set the level at which you will admit the reading was wrong — in advance, before the sentiment becomes your own.

The history of the Russian market shows that extreme sentiment repeats itself while its causes do not; this review of the differences is worth keeping in mind: crises of the Russian market. And separately: trading on sentiment makes sense only with money you do not need to live on — a reserve outside the market matters more than the accuracy of the reading.

What the data does not contain

To put it plainly: the platform does not publish a composite sentiment index for the Russian market, and there is no ready-made "fear/greed" figure to be had here. What is available are the primary cross-sections — prices, turnover, yields, flows, the news flow and the glossary of terms. You will have to assemble the summary yourself, and that is more of an advantage than not: somebody else's index hides what it is made of.