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To better understand when a market might be entering a dangerous phase, sentiment indicators are essential. Author and market analyst, who has dedicated a significant amount of research to understanding crowd psychology and behavioral finance, highlights that these indicators provide a quantitative measure of optimism and pessimism in the markets.

Understanding Sentiment Indicators

Investor sentiment can be visualized through cycles marked by emotions—excitement turns into euphoria at market peaks, followed by denial when the market starts to fall. This cycle ultimately leads to pessimism, panic selling, and capitulation—often viewed as the point of maximum opportunity for savvy investors.

The standard sentiment cycle includes: