Conditions where investor opinion is overwhelmingly one-directional — extreme bullishness or bearishness — suggesting the crowd is dangerously uniform in its positioning.
Deeper Explanation
Markets require a buyer for every seller. When sentiment reaches an extreme, the positioning becomes lopsided: too many investors are already on one side of the trade. The bullish extreme: everyone who wanted to buy has bought. Any additional positive news is already priced in; negative news has no buyers to absorb it — making the market fragile. The bearish extreme: everyone who wanted to sell has sold. Any negative news is already priced in; positive news sends prices sharply higher as the remaining sellers are overwhelmed. Sentiment extremes are measured quantitatively (put/call ratios, short interest, fund flows) and qualitatively (editorial tone, investor conversations, the absence of interest from the financial press).
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