Sentiment indicators try to measure what participants feel rather than what prices did. Each of the standard ones has a specific measurement flaw, and knowing the flaw is more valuable than knowing the indicator.
Where do the put-call ratio and margin debt go wrong?
The put-call ratio divides the volume of put options by the volume of calls, on the theory that heavy put buying marks fear and therefore a bottom. The flaw is that the mix of motives inside that volume is unobservable and unstable. A put bought as portfolio insurance by an institution and a put bought as a directional bet by a speculator enter the same numerator. Equity-only and index-inclusive versions of the ratio behave differently for exactly this reason, and any level that "used to mark bottoms" was calibrated on a mix that has since changed.
Margin debt is the aggregate borrowing against securities, and it rises in bull markets because the collateral is worth more. As a level it is nearly useless, because it grows with the market it is supposed to be judging. It becomes a statistic only when scaled, by market capitalisation or by nominal output, and even then it is reported with a lag of weeks.
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Why are surveys and fund flows misleading?
Adviser and investor surveys ask people what they think. The gap between what respondents say and what they have actually done with their money is the whole problem, and response rates are neither stable nor representative. Treat a survey reading as a rough contrarian input at extremes and as noise in the middle.
Fund flows carry an identity trap that catches professionals. Every share bought was sold by somebody, so a headline that a category "poured money into equities" describes a change in one category's holdings, not an inflow of money into the market. The counterparty is another category selling. In India the daily foreign-institutional and domestic-institutional numbers are widely quoted and constantly misread this way: the two series must, across all categories including retail and proprietary desks, sum to zero net of new issuance.
How is the volatility index different?
The volatility index is different in kind from all of these and should not be filed with them. It is computed from option prices, so it is a market price of expected variance rather than an opinion poll, and it is the one sentiment measure whose input nobody has to be honest about.