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METHODOLOGY · INDICATOR

Sentiment

When everyone is euphoric, nobody is left to buy.
WEIGHT
15%

WHAT WE MEASURE

Sentiment measures the collective mood of market participants, from retail investors to professional managers. It is a contrarian indicator: when sentiment reaches extremes in either direction, the market often reverses. Euphoria signals complacency and a lack of buyers left; fear and panic signal potential capitulation where sellers are exhausted.

WHY IT MATTERS FOR BUBBLE DETECTION

Markets are driven by the psychology of their participants as much as by fundamentals. Academic research by Baker & Wurgler (2007) showed that high investor sentiment predicts low subsequent returns, particularly for speculative and small-cap stocks. At sentiment extremes, market prices diverge from rational valuations, and those gaps always close eventually.
The VIX provides a real-time market-implied measure of fear. AAII and Investors Intelligence surveys capture self-reported positioning. The Put/Call ratio reflects actual money at risk. Each signal is normalised against its own history and combined into the Sentiment score, contributing 15% of the composite.

KEY METRICS & THRESHOLDS

VIX (Volatility Index)
The CBOE Volatility Index measures implied volatility of S&P 500 options over the next 30 days. Known as the "Fear Gauge," it rises when market participants are buying protective puts and falls when they are complacent. A persistently low VIX (< 13) is itself a warning sign of excessive complacency.
SOURCE: CBOE (cboe.com/vix); launched 1993, back-calculated to 1990
Complacency (Risk-On)
< 13
Calm
13 – 18
Elevated Anxiety
18 – 28
Fear
28 – 40
Panic / Capitulation
> 40
AAII Bull / Bear Spread
The American Association of Individual Investors runs a weekly survey asking members whether they are Bullish, Neutral, or Bearish over the next 6 months. The Bull-Bear Spread is the percentage of bulls minus bears. Published every Thursday since 1987. Historical average: ~38% bullish, ~30.5% bearish.
SOURCE: AAII Investor Sentiment Survey (aaii.com)
Extreme Fear (Opportunity)
Spread < -30%
Bearish Sentiment
Spread -30% to -10%
Neutral
Spread -10% to +15%
Bullish
Spread +15% to +35%
Extreme Greed (Warning)
Spread > +35%
Put / Call Ratio
The ratio of put option volume to call option volume across US equity markets. A high ratio (more puts than calls) signals fear and hedging demand. A very low ratio signals that traders are piling into upside calls with little hedging, a sign of speculative excess that historically coincides with market tops.
SOURCE: CBOE Daily Market Statistics
Extreme Greed
< 0.6
Bullish Bias
0.6 – 0.8
Neutral
0.8 – 1.0
Cautious
1.0 – 1.2
Fear / Panic Hedging
> 1.2

HISTORICAL EPISODES

Jan 2000
Dot-com Peak
SIGNAL
AAII Bulls hit 75% (all-time high); VIX < 20 despite sky-high valuations
OUTCOME
S&P 500 -49% over next 2.5 years
Mar 2009
GFC Bottom
SIGNAL
AAII Bears hit 70%; VIX near 56
OUTCOME
S&P 500 +400% over the next decade
Nov 2021
Post-COVID Peak
SIGNAL
VIX near 15; AAII Bulls ~48%; speculative frenzy in meme stocks and crypto
OUTCOME
S&P 500 -25%, Nasdaq -35% in 2022
Mar 2020
COVID Crash Bottom
SIGNAL
VIX hit 85.47; CNN Fear & Greed at 3/100
OUTCOME
Markets bottomed; S&P 500 +114% over next 18 months

HOW TO INTERPRET THE SCORE

Fearful Market
0 – 25
Investors are cautious or panicking. Historically a contrarian buying signal.
Neutral
25 – 50
Mixed signals. No strong sentiment extreme in either direction.
Optimistic
50 – 75
Bullish sentiment building. Complacency beginning to appear.
Euphoric
75 – 100
Extreme greed. Contrarian sell signal: who is left to buy?

ACADEMIC & INDUSTRY SOURCES

[1]
Baker, M. & Wurgler, J.: Investor Sentiment in the Stock Market2007
[2]
Brown, G.W. & Cliff, M.T.: Investor Sentiment and the Near-Term Stock Market2004
[3]
Shiller, R.J.: Irrational Exuberance (Chapter on Sentiment)2000
[4]
CBOE: VIX White Paper: CBOE Volatility Index2009