sentiment
Sentiment is a gauge, not a signal
The rule
Fear-and-greed gauges describe where the mood has been; they read the past and never ring the bell on the turn.
Where it flips
An extreme sentiment reading feels like it marks the exact turn. Where it misleads: you sell on 'extreme greed' or buy on 'extreme fear' as a timing signal. The fix: use sentiment to size your caution and expectations, and never to call the day of the reversal.
Sentiment measures - fear-and-greed indices, market breadth, the VIX, positioning - tell you the temperature of the crowd. That is useful context: extreme greed means less margin for error, extreme fear means a lot is already priced in. But the mood can stay hot or cold far longer than seems reasonable, so the reader uses sentiment as a thermometer, never as a timer for the turn.
A worked example
A fear-and-greed gauge sits at extreme greed. It tells the reader the crowd is stretched and to demand more caution, not that tomorrow is the top. Greed can run hotter for months before anything breaks. [illustrative]
How to spot it
- ·a fear-and-greed or VIX reading at an extreme
- ·sentiment used to describe the crowd, not time the turn
- ·the mood staying stretched far longer than expected
- ·caution sized to the reading, not a dated call
Howard Marks · The Most Important Thing