In the fast-paced world of the Indian share market, it is very common for emotions to run rampant. The "fear of missing out" (FOMO) can lead investors to buy at the top, and panic selling can cause them to sell at the bottom, resulting in significant losses. What if there were a way to assess how investors, as a collective, feel (or are feeling) so that you can make more rational decisions? This is where the Market Mood Index (MMI) comes into play.
In this blog post, we will clarify what the MMI is, what the MMI means for the Indian investor, and most importantly, how you can use this powerful sentiment indicator to help you more accurately traverse the ups and downs of the market. To truly master the nuances of investing and trading, consider exploring our comprehensive Stock Market Training Online Courses designed for all levels.
What is the Market Mood Index (MMI)?
The MMI is an advanced sentiment indicator that gauges the market's overall sentiment on a scale of optimism or pessimism that is prevalent among investors in the stock market. You can think of it as a "mood meter" that gives a numerical score (to clarify, it is not a rank) to emphasize how fearful or how greedy investors are feeling at any given time.
The MMI was developed by analysing the combination of important indicators that generally formulate the MMI score and is typically on a scale from 0 to 100:
Extreme Fear (0-29/30): This zone refers to investors nearly capitulating if not already in full panic mode. Prices are very likely oversold, and there may be opportunities for investors who are savvy to buy.
Fear (30-49): Although apprehensive, the market is still dealing with uncertainty. Prices could go down, and savvy investors start looking for any sign of stabilization.
Neutral (50): The market is balanced with no emotional bias. The market may be consolidating or waiting for a new catalyst.
Greed (51-70): There is rising optimism, and prices are moving up while investors remain confident. However, caution should be exercised because the market could be close to being overbought.
Extreme Greed (71-100): Investors often disregard caution, and often are markets often get overheated at this stage, and have a higher risk of correction.
How is MMI Calculated?
The MMI is not some random number. The MMI is made up of a proprietary algorithm based on a few key factors relative to the Indian stock market.
India VIX (Volatility Index): Often called India's "fear gauge," (higher) VIX usually means more fear and uncertainty in the market.
FII-DII Activity: The nature of buying and selling of Foreign Institutional investors (FIIs) and domestic institutional investors (DIIs) will change and drive sentiment in the market.
Market Breadth: Market breadth is the number of advancing stocks or declining stocks. If a rally is broad, there is optimism reflected all the way across the market. If you see declining breadth, you know to be cautious.
Price Strength: Measures like the percentage of stocks at their 52-week highs versus 52-week lows can measure the strength of a price movement.
Momentum Indicators: Certain indicators, like Exponential Moving Averages (EMAs) or Relative Strength Index (RSI), can also measure the speed and intensity of price change. More on these indicators can be found on our blog, Top Technical Analysis Tools.
Why the Market Mood Index is Crucial for Indian Investors?
The Indian share market is typically strongly volatile and is heavily impacted by the sentiment of retail investors. Therefore, the MMI is particularly important for Indian investors for several compelling reasons:
Overcoming Emotional Bias: The MMI provides a neutral perspective, allowing you to see when your emotions (such as FOMO or panic) could be skewing your opportunities/risks. It allows you to take the contrarian side: "be fearful when others are greedy, and greedy when others are fearful." If you struggle with emotional decision-making in the market, our course on the Art of Emotion Controlling in Stock Market Trading can provide invaluable strategies.
Identifying Possible Entry & Exit Points: While the MMI cannot indicate outright predictions, it does indicate "zones of opportunity." "Extreme Fear" can indicate good times to accumulate quality stocks, and "Extreme Greed" indicates a risk of a new aggressive entry and could be a good time to book partial profits.
Risk Management: Understanding the current mood of the market allows you to manage risk across your portfolio. In "Extreme Greed", this might indicate that you should decrease their equity exposure or directly go to "hedging opportunities".
Complementing Analysis: The MMI is a strong complementary factor; it enhances both fundamental analysis and technical analysis.
Navigating Volatility: The MMI cuts through the noise during volatile periods, giving you the collective emotional reaction at that particular point in time, which is incredible when making decisions.
How to Use MMI in the Indian Share Market?
Now that we have explored the MMI, let's investigate how investors in India can actually use it in practice:
1. Finding the MMI for Indian Markets
Many financial websites and brokerage firms provide live/near-live Market Mood Index data for the Indian market. Some commonly used resources where you can check the MMI include Tickertape, Jainam Broking, and various stock market news websites. A quick search for 'Market Mood Index India live' will present you with several options.
2. Interpreting MMI Readings & Taking Action
MMI in "Extreme Fear" (0-29/30):
What it signifies: The market is probably oversold based on sheer panic. All investors are potentially indiscriminately selling stocks, and often don't care about their fundamentals.
Actionable insight: This is where Warren Buffett's famous quote will be most applicable. Consider this a 'sale' period for quality stocks. Look for fundamentally strong companies that have been valued at a reasonable price. This is a great period for long-term investors to scale into or add to positions through Systematic Investment Plans (SIPs) or even lump-sum investing (if other factors warrant it).
Indian Market Context: Think about the market corrections driven by global stress events or noteworthy changes in domestic policy. This is a situation where contrarian investors excel.
MMI in "Fear" (30-49):
What it means: Caution is in the air, and prices are under pressure. While not total panic, there is uncertainty in the market.
Actionable insight: Keep watching. Watch for potential signs of reversal patterns on the charts (get familiar with patterns such as the shooting star candlestick pattern). You could consider gradual accumulation or setting yourself up if specific technical levels are met.
MMI in "Neutral" (50):
What it means: The market is balanced; there isn't a strong emotion pushing the market in any direction.
Actionable insight: Focus on news and fundamentals related to specific stocks. If you are willing to trade week to week, this could be a time for swing trading opportunities.
MMI in "Greed" (51-70):
What it means: Optimism has built, and prices are trending upwards. It feels good, and you should see some confidence.
Actionable insight: Be vigilant. A good place to consider being careful of chasing stocks is when optimism has built up. Even though they can absolutely move higher, the risk-reward for new aggressive entries is likely less favorable. Think about taking some partial gains if you have a stock that has rallied significantly.
MMI in "Extreme Greed" (71-100):
What it means: Euphoria and irrational exuberance have reached extreme levels. Multiples are at their peak. The market may get ready for a downside correction.
Actionable insight: Be extremely cautious! Historically, it is not a good time to be aggressively buying. On the contrary, think about taking profits, rebalancing your holdings, or even initiating short positions (if you are an experienced investor). You should not get sucked into the herd mentality!
3. Combining MMI with Other Tools
Yes, the MMI is powerful, but you will achieve the best results if you integrate the MMI into an overall analysis plan.
With Technical Analysis: If the MMI is in the "Extreme Fear" range, and the Nifty 50, or a stock you are analyzing, is near a strong support level on its technical chart that overlaps, it can set up a strong buy signal. Correspondingly, "Extreme Greed" that coincides with a resistance level may be a good indication to sell.
With Fundamental Analysis: MMI should be used to help guide its search for fundamentally strong companies. If the MMI is at "Fear," it is now time to really identify undervalued stocks, dive into balance sheets, and read earnings reports.
Macroeconomic Factors: Always keep in mind the wider state of economic indicators and geopolitical happenings impacting sentiment. The role of the RBI in the Indian economy, geopolitically imposed government policy, and persistently evolving global economic conditions are dynamic drivers of market sentiment impacting the MMI.
Conclusion
The Market Mood Index should provide any investor understanding of the complexities of the Indian share market, a huge value-add. The MMI quantifies the problem of investor sentiment and permits you to step back from your emotional reaction to noise and surplus data, allowing you to make sensible, data-driven decisions. Although the MMI should never be used as your only indicator, it can gives you a lot more potential value than other traditional measures, when used in conjunction with proper fundamental and technical analysis, as it is an excellent indicator of what opportunities won't eventually come around again, during anxious, fearful times, but also considerably help apply caution during exuberant, greedier opportunities.
To help yourself get a better feel for the emotional pulse of the market, you will place yourself in a position to best take advantage of the ebbs and flows of the Indian stock market as you move towards your financial goals.
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
.jpg)
