The stock market operates based on collective investor sentiment. Positive news boosts stock prices, while negative sentiment drags them down.
So, how can investors gauge market sentiment? Enter the Market Mood Index (MMI). This article explores the MMI, how it is calculated, its pros and cons, and how investors can leverage it effectively.
What is the Market Mood Index?
Introduced in 2004, the Market Mood Index (MMI) initially gauged market sentiment solely through investor optimism or pessimism. Over time, it evolved to include economic indicators, geopolitical events, and corporate earnings growth.How is the Market Mood Index Calculated?The MMI considers six critical factors:● FII Activity: Net open interest of FIIs in NSE index futures.
● Volatility: Measured by the India VIX index.
● Momentum: Difference between 90-day and 30-day exponential moving averages of Nifty 50, divided by the 90-day moving average.
● Market Breadth: Advance-decline ratio divided by advance-decline volume.
● Price Strength: Net percentage of stocks near their 52-week highs minus those near their lows.
● Demand for Gold: Relative price return of gold versus Nifty 50 over the last two weeks.
An algorithm assigns equal weights to these factors, generating a numerical MMI score that reflects market sentiment.
The MMI ranges from 0 to 100. A score of 50 indicates market neutrality. Scores above 50 signify optimism and bullish trends, while scores below 50 indicate pessimism and bearish trends.
Zones of the Market Mood Index
Understanding the MMI zones helps investors make informed decisions:
● Extreme Fear (Below 30): Indicates deep market pessimism, potentially signalling buying opportunities.
● Fear (30-50): Suggests market caution amid volatility, requiring careful investment decisions.
● Greed (50-70): Indicates bullish sentiment and potential overvaluation, prompting cautious optimism.
● Extreme Greed (Above 70): Reflects irrational exuberance and may signal market overheating, advising prudent portfolio adjustments.
Advantages of the Market Mood Index
● Pulse Check: Quickly assesses market sentiment and potential future trends.
● Decision Support: Complements technical and fundamental analysis, aiding confident decision-making.
● Event Impact: Tracks real-time effects of events like elections and policy changes on market sentiment.
Disadvantages of the Market Mood Index
● Risk Ignorance: Ignores individual risk tolerance and investment objectives.
● Subjectivity: Prone to investor biases and erratic reactions, leading to unpredictable readings.
● Short-Term Focus: Primarily useful for short-term trading, potentially distracting long-term investors.
Conclusion
While the Market Mood Index can enhance investment decisions, it is crucial to integrate it with comprehensive analysis and align it with personal risk profiles and objectives. It serves as a valuable tool in navigating market sentiment but should not be the sole basis for investment strategies.
Note: The article is for information purposes only. This is not an investment advice. Disclaimer: https://tejimandi.com/disclaimer
(The author is Vice President of Research, TejiMandi)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
