It’s important to have a good understanding of the market mood. MMI or market mood index helps you to do so. Because a wrong guess can lead you to a heavy loss. That is why it is important for you to know the right time to make a buy move or sell the move. Suppose everyone is selling the Nifty index. In such a scenario do not go with the flow. Just because everyone is selling it does not mean you can not buy the market at that time. Rather you can find a buying opportunity in that time. But you have to keep in mind that it won’t be profitable as intraday trading but on a holding situation. On the other hand, the market mood also helps you to find the right time to exit from the market as well.
Tickertape website has such a kind of Market Mood Index indicator. This indicator will help you to understand the current market situation. In the following, we shall learn about Market Mood Index and how to use it to better understand the market and trade according to it. Let me present you the Market Mood Index or MMI below first.
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Frequently asked questions about Market Mood Index (MMI)
Market Mood Index is nothing but the market sentiment indicator which helps us by showing the current market situation. It analyses the market throw and suggests the present market condition. It is divided into 4 parts which help to determine what is the right time to book your profit or to invest in the index.
As we all know MMI indicators analyze the market then show it to us. What is the actual condition of the market? So that we could understand the right time to invest in or map off from the market.
The other name of the Market Mood Index is Market Sentiment.
Market mood Index is also known as MMI, It not only helps the traders but the investors as well. As it suggests the right time to buy or sell. That is why short-sellers utilize that analysis and invest at the right time to gain from it. On the other hand when the price drops investors buy the index or some stock, then from time to time sell 50% or whole of it and book their profits.
Definition of Market Mood Index or MMI
A market mood is defined as an investor’s overall attitude toward certain security or financial market. It’s the mood or tone of a market, or the psychology of its participants, as represented in the activity and price movement of the securities traded there. Rising prices imply a bullish market mood, whereas dropping prices reflect a pessimistic market mood in general. Tickertape’s MMI or market mood index indicates whether the market is in a bullish trend or bearish trend.
When we heard that a certain stock has made a bullish trend without thinking twice we just went after that stock and put our money into it. Though at that time the stock price has gone high already. So there is very little possibility that the stock will help you to earn profit. Sometimes it is also being seen that after you put money on a certain stock that stock went down on a bearish market. That suggests putting money on a stock is easy but knowing the right time is the main key to unlocking profits. This Market Mood Index or MMI indicator suggests the average market situation. It helps us by telling the right time to invest money or book profit.
Let us explain with an example
Suppose a stock is doing very well it went up from 50 rupees to 100 rupees in its price on a bull market. Now, when you heard about it, you saw an opportunity of earning profit from there.
So you buy ten stocks by paying 1000 rupees. But the downtrend of that stock has already started by then. But you are still holding it assuming that it might gonna go up as well and it continues to fall. Out of fear you decide to sell it out at 60 rupees/share price. It means that share gives you 60 rupees in all total. So now if we sum up we will see that you put money on a bullish market and you lose (100-60)=40 rupees per share. You face this loss because you did not know the right time to invest in a stock. The time you have chosen to invest your money at the wrong time.
What are the types of market in the Market Mood Index (MMI)
In the following, we shall take a look at each of the parameters of MMI or market mood index indicator. Let us discuss each of them with an explanation to understand it clearly,
|MMI/ Market Mood Index||Range|
|Extreme Fear||Less than 30|
|Fear||30 to 50|
|Greed||50 to 70|
|Extreme Greed||More than 70|
i) Extreme Fear
High severe fear (below 30) indicates that now is an excellent opportunity to open new positions. Hence, markets are likely to be oversold and may begin to rise.
Suppose you are keeping your eye on the market but due to its volatility, you are unable to understand the right time to buy it. As every other one is selling that market you have become more afraid to put your money into it. But according to the Market Mood Index, it is the right time to invest in the market or buy the futures of the stock index. But you also have to analyze it before putting money on it. Whenever the index hits your expected profit margin, book it. That is how you can use the “Extreme Fear” to use it for your wellness.
(30—50) is the range of the indicator.
It implies that investors are concerned about the market, but the appropriate course of action depends on the MMI’s direction. If it drops from Greed to Fear, it suggests the market is becoming more fearful. As well as the investors should wait until it hits Extreme Fear to see if the market will turn upwards. If MMI is derived from extreme fear, it indicates that market fear is decreasing. If not the best time, now might be a good time to invest in the market.
As per the indicator, it stands in the “Fear” section. This kind of market situation is very tricky. Because we do not know how the sentiment of the investors and traders going to move the market next. From this situation, the market might move upwards or might fall in downloads as well. So it is better to wait for a little or take a step back if you are intending to invest. If you see the market still going upwards then invest in the market.
When the range stays at 50 to70. It is in the greed index.
It suggests that investors are acting irrationally in the market. But the appropriate course of action will be determined by the MMI trajectory. If MMI moves from Neutral to Greed, it suggests the market is becoming more greedy, and investors should worry about establishing new positions. If MMI falls below Extreme Greed, it indicates that market greed is decreasing. However, it is advisable that you wait a little longer before looking for something new.
Suppose the index future is going upwards. Very soon it also hit your target of profit margin but you still holding it. As the index still continues to its uptrend. Such a scenario does not flow with the market sentiment. Control your greed and book your profit as soon as possible. Otherwise, you can also wait until it touches extreme greed. As soon as it hits it map your profit.
iv) Extreme Greed
Investors should avoid opening new positions if extreme greed is high (above 70). As markets are overbought and likely to fall. This situation is the best example to keep yourself away from investing in any stock. Because there is a chance of correction in the market.
This parameter is known as “Extreme Greed”. This is the worst time to invest freshly in any stock or the index in an extreme greed situation. As the index price is already high. It will cost you more than its usual price if you invest in that stock at that time. There is also a possibility that in no time the downtrend of that index will start. Suppose you buy a stock at a high price then its downtrend started at such a scenario it is quite possible that you invested expecting a huge profit but you ended up making loss into that stock.
The above chart will help you to understand the correlation of the MMI indicator and the Nifty index year by year.
How Tickertape built MMI or Market Mood Index
see what are the key ingredient to prepare the Market Mood Index. So in the following, we shall discuss the six main parts which help us to build MMI or Market Mood Index
a) FII Activity of MMI or Market Mood Index
The very first thing that helps to build a market mood index or MMI is FII Activity.
Definition of FII Activity
FII refers to Foreign Institutional Investor. It is an international company or foreign company which works as an institutional investor. Such companies invest in other companies. This investment can be in the form of hedge funds, mutual funds, insurance companies, banks, corporates, etc. Though such companies are registered in another country than India but able to invest in the Indian stock market.
Why do international institutional investors put money into India?
The majority of foreign institutional investors want to invest in emerging countries. FIIs are looking for developing economies with great development prospects. Investing in a growing economy is similar to buying growth stocks for an FII. When we do this, we hunt for equities that continue their upward trend. This is how FIIs view India, a developing country. It is considered that India is one of the world’s fastest developing economies. It is also stated by the World Bank that India is a stable and resilient economy with good growth prospects. Even with the disruptions caused by demonetization and the installation of the GST, the country’s average growth rate over the last three decades has been on the upper side.
b) Market Breadth
Market Breadth measures the number of stocks that are advancing in value vs those that are declining. It is beneficial mainly when a greater number of stocks are going upwards rather than downwards. This shows that the market as a whole is doing well. When more equities are moving lower, market breadth is negative, implying that the broader markets and economy are hurting. Market Breadth is calculated by using the Modified Arms Index or also called as TRIN. The lower the index goes the stronger the market, and vice versa.
What effect does market breadth have on MMI?
Price swings occur all the time in the market, but when they are accompanied by high trading volume, it indicates that the trend is more real and likely to persist. The Modified Arms Index helps us to measure it. It confirms the strength of the market direction anticipated by other MMI indicators.
c) Volatility and Skew
When we talk about the Indian share market we mainly referred to BSE or Bombay Stock Exchange and NSE or National Stock Exchange. When a market is not clear about its trend that is considered a volatile market. Suppose the market is going upwards for a continuous 3-days that is an uptrend and when the opposite thing happens means when the stock selling is at its peak that means it is a downtrend. Another situation is the market fluctuates, which means one day it’s up and the next day it’s down. If that happens for a long period of time then it is called volatility.
Skew is a market indicator that suggests and predicts the next move of the market. Skew with a high average value implies that the market is likely to move lower. A greater Skew value indicates that the MMI will migrate towards the Fear Zones, whilst a lower Skew indicates that the MMI will move into the Greed Zones.
Momentum is a term in the stock market. This term describes how far a market or stock has moved from a certain position. There are various ways to estimate that. It is calculated using Nifty’s exponential moving averages. A positive exponential moving average indicates a bullish market. As a result, the MMI finds itself in Greed Zones. A negative exponential moving average, on the other hand, indicates a bear market, and the MMI enters Fear Zones as a result.
e) Price Strength
It is also a momentum indicator that helps to understand in which way the market is moving. It suggests an upcoming downtrend or it could be an uptrend or bullish as well. Suppose some stock has hit the 52-weeks high. Now if we divide that by the total number of stocks the percentage of Price Strength will appear on your screen.
A positive and rising price strength suggests that the market is bullish, whilst a negative and falling price-strength show that the market is bearish. Price strength is a momentum indicator that indicates whether the market is approaching a bullish or negative phase. We can use it in conjunction with other MMI indicators to determine whether the market is in greed or fear zone.
f) Demand for Gold
The price return of gold over the last two weeks is compared to the return of Nifty over the same time period. It helps to determine gold demand. When the return on gold beats the return on the Nifty, it shows that investors are shifting their portfolios away from equities but towards safer assets such as gold.
The price of gold is directly proportional to the demand for gold. The price of gold depends on the demand and supply mechanism like a commodity. When there is a significant demand for gold, the price of gold rises. When demand is low, on the other hand, the price drops.
This index is only helpful if you are interested in investing or swing or delivery trading. Otherwise, if you have good knowledge about the market only then you might use it for intraday or short sell process. Because it takes time to change the parameter and presume it and move according to it is not a piece of cake. In the end, all we can say is that it is a very useful indicator if you know how to use it. If you understand it thoroughly then utilizing it is not a big thing. It will help you to enter the market at the correct time and also suggest you the right time to map up your profit.