The "Mood Indicator" compares how investors currently regard the stock with how they have viewed it in the past. Another word for "mood" might be "confidence."
When investors are in a buying mood, they're willing to pay more for a dollar of earnings (a higher PE) than they normally do. They're confident (and sometimes overconfident) of the company's earning ability and bid up the price. It becomes a "hot" stock.
On the other hand, when investors are in a selling mood, they've lost their confidence in the company for some reason, and their interest has "cooled." That reason may or may not be a valid one.
A PE that's within 10 percent of what they've paid historically for a dollar of the company's earnings is a desirable condition. Investors are "comfortable.
A PE that's more than 10 percent above its historical average indicates that the stock is "hot." Unless the price is at or below the buy price, it's probably a good idea to wait until it becomes more reasonable.
A PE that's more than 10 percent below the average could indicate that the stock is a bargain. More often, however, especially when it's well below the average, it means others know something negative about the company that you don't. Don't buy the stock unless you're sure there's no good, fundamental reason for its selling at such a low price.
A company's stock may be categorized in three ways:
Reasonable. Investors are paying approximately what they have in the past.
Hot. Investors are in a buying mood and are willing to pay significantly more than they have averaged in the past for the stock.
Cool. The stock appears to have gone out of favor. Investors are selling for some reason. You should find out if their reason is valid before considering a purchase.
To see how this value is calculated, review the Worksheet for a stock. Look for the "HVR."