Learn with ETMarkets: Market Mood Index (MMI): Explained!
Sensex and Nifty 50 trading at highs, concerns about an impending stock market crash or significant decline are natural. This fear intensifies considering the substantial rise in midcap and smallcap stocks over recent years.
The stock market operates based on collective investor sentiment. Positive news boosts stock prices, while negative sentiment drags them down.
So, how can investors gauge market sentiment? Enter the Market Mood Index (MMI). This article explores the MMI, how it is calculated, its pros and cons, and how investors can leverage it effectively.
What is the Market Mood Index?
Introduced in 2004, the Market Mood Index (MMI) initially gauged market sentiment solely through investor optimism or pessimism. Over time, it evolved to include economic indicators, geopolitical events, and corporate earnings growth.
How is the Market Mood Index Calculated?
The MMI considers six critical factors:
● FII Activity: Net open interest of FIIs in NSE index futures.
● Volatility: Measured by the India VIX index.
● Momentum: Difference between 90-day and 30-day exponential moving averages of Nifty 50, divided by the 90-day moving average.
● Market Breadth: Advance-decline ratio divided by advance-decline volume.
● Price Strength: Net percentage of stocks near their 52-week highs minus those near their lows.
● Demand for Gold: Relative price return of gold versus Nifty 50 over the last two weeks.
An algorithm assigns equal weights to these factors, generating a numerical MMI score that reflects market sentiment.
