Market sentiment is a fuzzy concept.
In its most basic sense, it's the aggregate beliefs and moods of actors that comprise the total market.
It's tough to measure, gauge and test. And so, it's often discarded completely or superfluously used to confirm one's own biases.
But learning how to play the player (market sentiment) is vitally important, because in the end it's these beliefs that move markets. Here's the following from the Philosopher interview in Steven Drobny's book The Invisible Hands:
By sentiment I do not mean some kind of vague general feeling or emotion. I mean the reflection of people's beliefs, which are based on something real and tangible, which will change their actions. Although beliefs tend to be driven by fundamentals, people and markets are very slow to fully incorporate macro information, and when they do the results can be overly dramatic.
Our beliefs drive our actions…
