A closer look at the Sentiment Cycle Composite
NOTE: I am away for two weeks. In the interim, I have chosen to republish some older notes. The topics are either relevant again to current market conditions or educational in nature regarding an indicator or system I have found useful in the past.
The note below was first published in October of 2025.
Key points
- Historically, investor sentiment has tended to be correct in the middle, and wrong at the extremes
- We have identified four components of investor sentiment - panic, discouragement, enthusiasm, and returning confidence
- Our Sentiment Cycle Composite indicator combines all four components and serves as a practical trend-following guide of overall investor sentiment
The Sentiment Cycle Components
Investor sentiment can be complex and cyclical, so we developed the Sentiment Cycle Composite to simplify the analysis of emotional shifts in the market. This new indicator combines four key phases of the sentiment cycle - Panic, Discouragement, Enthusiasm, and Returning Confidence-into a single measure, offering a concise view of market behavior at any given time. Balancing optimism and pessimism helps investors better understand the current emotional state of the market and its historical context.
Panic