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For investors, determining the optimal times to buy or sell assets like mutual funds and shares is a crucial concern. While many look to financial analysts for insights into market trends, tools like the Market Mood Index offer valuable guidance.
This index helps investors make informed decisions by providing a snapshot of current market sentiment. This article explores what is Market Mood Index, explaining how it functions in assessing India's daily market sentiment.
The Market Mood Index is a market indicator that measures the sentiment of fear and greed in financial markets. It was developed by MarketPsych, a US-based quantitative behavioural finance research firm, in 2004 to quantify how emotions drive market behaviour beyond traditional analysis.
The Market Mood Index (MMI) is a tool that helps in identifying market sentiment. It shows how investor psychology might be having a bigger impact on the market.
If the MMI indicates higher greed sentiment, we often see increase in investments or a 'bullish trend'. When there's a lot of fear, markets usually drop, with more sales of shares in market. Spotting these trends can help investors assess risks and decide what to do next.
While the MMI offers meaningful insight into market psychology, it is most effective when used alongside fundamental and technical analysis. Together, these tools contribute to a more balanced and informed view of market behaviour.
The Market Mood Index in India works the same way as the one used globally. However, to accurately gauge the environment of the Indian stock market, it incorporates specific elements such as:
By tracking the flow of money from FIIs into Indian markets. If purchases exceed sales, the MMI shifts towards ‘Greed’, while higher sales than investments signal ‘Fear’.
The MMI includes the India Volatility Index (VIX) to assess market fluctuations. A higher VIX suggests increased uncertainty or apprehension in the market, while a lower VIX indicates investor confidence in market trends.
The MMI also analyses major indices such as the Nifty 50 and Sensex to identify when markets are overbought (greed) or oversold (fear).
The market mood index chart has five zones:
MMI Zone
Description
Extreme Fear (0-30)
Indicates high pessimism; market may be undervalued and potentially oversold.
Fear (30-50)
Cautious sentiment: investors are generally risk averse.
Neutral (50)
Balanced sentiment; no strong bias towards buying or selling.
Greed (50-70)
Investors are optimistic; market may be approaching overbought levels.
Extreme Greed (70 -100)
Signals overconfidence; market may be overvalued and due for a correction.
Aside from VIX and FII, the other components of Market Mood Index are:
As an investor, it’s important to understand how Market Mood Index in India changes. Here are some of the key factors influencing Market Mood Index (MMI).
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Gaining insights into the emotional pulse of the market can provide essential context around stock price fluctuations. The Market Mood Index (MMI) measures investor sentiment, which spans from extreme fear to extreme greed. When compared with NIFTY 50's performance, the MMI can suggest periods of market overheating or undervaluation, often indicating possible turning points.
To help you understand Mood Market Index (MMI) trends, this table provides yearly sentiment trends and market turning points from 2021 to early 2024, with the prevailing sentiment derived from MMI during those periods.
Year
Periods of Market Highs
Periods of Market Lows
Dominant MMI Sentiment
2021
May
Mar, Apr, Dec
Extreme Fear, Greed
2022
Apr, Sep
Jun, Dec
Extreme Greed, Fear
2023
May, Jun, Jul
Jan, Mar, Sep
2024
—
Feb
Mostly Neutral Zone
Note: A market top for 2024 is not listed as no significant reversal or extreme greed sentiment has been observed so far in the available data. The NIFTY 50 trend remains upward, but without confirming signs of a peak.
Investors can benefit from Market Mood Index to assess overall market sentiment. The insights on greed and fear becomes useful especially when considering entry or exit from market.
Some of the key benefits of Market Mood Index include:
Although the market mood indicator provides useful information on investor behaviour, depending on it for investment decisions can lead to exposure to risks for your investments. It’s important be aware of limitations of Market Mood Index such as:
The Market Mood Index (MMI) can help traders gauge the underlying sentiment before making moves. Here's how you can use it effectively during trading decisions:
Suppose the MMI index is at 85, indicating extreme greed, and major indices like the Nifty 50 or Sensex are near record highs. A trader holding short-term positions may decide to book profits, expecting a potential correction due to overheated sentiment.
On the other hand, if the MMI index falls to 25, suggesting fear, and the market is trading lower, long-term investors might view this as an opportunity to buy quality stocks at discounted prices. Using the market mood index in this way can help align trading actions with prevailing sentiment.
The Market Mood Index (MMI) can support a variety of investment strategies by helping investors gauge sentiment and make better decisions. Here’s how it fits into different approaches:
This involves doing the opposite of market sentiment. If the MMI index shows extreme fear, prices may be undervalued, offering a potential buying opportunity. When it reflects extreme greed, it could be a good time to reduce positions or book profits.
Traders watch the direction of the MMI. A rising index may suggest growing optimism and a possible uptrend. A falling MMI may point to caution and a shift towards defensive positioning.
Changes in the MMI can help you adjust exposure. During periods of high fear, you may reduce risk. As optimism returns, you can reassess and increase equity allocation where appropriate.
You can use the MMI to time market entries and exits. For example, extreme fear readings may signal attractive entry levels, while high optimism may indicate a good time to pare back exposure.
Shifts in market mood may also guide sector choices. In times of optimism, cyclical and growth stocks often gain favour. During fear, investors may prefer defensive sectors or assets.
Investors use a variety of other indicators to assess the market and their strategies, here’s how MMI compares with other market indicators:
Other Indicators
What Do They Measure
How Are They Different from MMI
Relative Strength Index (RSI)
Price momentum
Based on historical price data, not investor mood
Volatility Index (VIX)
Expected market volatility
Gauges price swings, not sentiment
Moving Average Convergence Divergence (MACD)
Trend strength and direction
Tracks price trends, not emotional behaviour
While the Market Mood Index offers an insight of market sentiment in India, investors may also consider other indicators to gain a broader perspective:
The market mood index India offers a snapshot of investor sentiment, helping you assess market conditions more effectively. Whether you use the MMI index for timing, trend confirmation, or as part of a broader strategy, it can add valuable perspective to your investment approach. For expert guidance and tailored solutions, explore Wealth Management with DBS Treasures and make more informed financial decisions.
