What Is the Fear & Greed Index?
The Fear & Greed Index gauges investor sentiment by indicating how emotions influence stock prices. Driven by the premise that excessive fear drives prices down and excessive greed boosts them up, this index offers valuable insight into whether stocks are fairly priced at any given time.
Key Takeaways
- Measures investor sentiment and stock pricing fairness.
- Indicates how fear drives stocks down and greed pushes them up.
- Calculated based on seven distinct indicators.
Illuminating Market Sentiment: How the Fear & Greed Index Works
The index evaluates market sentiment based on how emotions such as fear and greed impact stock prices. A key premise is that fear moves stocks below their intrinsic value, while greed elevates them. Evaluated using seven market behaviors, the index acts as both an investment research tool and a market timing barometer.
Before solely relying on this index for making decisions, it’s prudent to consider additional research. Financial markets are complex, and incorporating multiple viewpoints can lead to more balanced investment choices.
The Seven Pillars of Fear & Greed Index
Stock Price Momentum
- Measures the S&P 500 against its 125-day moving average.
Stock Price Strength
- Compares numbers of stocks at 52-week highs versus lows on the NYSE.
Stock Price Breadth
- Analyzes trading volumes in rising vs. declining stocks.
Put and Call Options
- Examines the lag or lead between put and call options reflecting investor fear or greed.
Junk Bond Demand
- Tracks the spread between yields on investment-grade bonds and junk bonds.
Market Volatility
- Uses the CBOE’s Volatility Index (VIX) based on a 50-day moving average.
Safe Haven Demand
- Assesses the differences in returns between stocks versus treasuries.
The index combines these seven indicators and averages them to derive a score. A neutral reading is set at 50, with higher scores indicating greed and lower scores implying fear.
| Fear & Greed Index Scores and Sentiments | |
|---|---|
| Score | Sentiment |
| 0 to 24 | Extreme Fear |
| 25 to 44 | Fear |
| 45 to 55 | Neutral |
| 56 to 75 | Greed |
| 76 to 100 | Extreme Greed |
Historical Readings of the Fear & Greed Index
Historically, this index has been a useful tool for understanding turning points in equity markets. For instance, during significant financial turmoils like the Lehman Brothers collapse in September 2008, the index fell to 12. Conversely, it soared over 90 in September 2012 following global equity rise thanks to the Federal Reserve’s quantitative easing rounds.
During the initial rise of the COVID-19 pandemic, it reached an annual low of 2 on March 12, 2020. However, optimism about a vaccine later propelled it to 69 by November 2020.
Fear & Greed in the Cryptocurrency Realm
Exploring beyond traditional equities, the concept of a fear and greed index has also been applied to the cryptocurrency market. Developed by Alternative.me, this adapted index captures sentiment around Bitcoin and other cryptocurrencies through various inputs like volatility, market volume, social media mentions, and relevant search trends.
Inputs for the Crypto Fear & Greed Index
- Volatility over past 30 and 90 days.
- Market volume and momentum.
- Social media mentions on X platform (formerly Twitter).
- Bitcoin market cap dominance.
- Google Trends data for Bitcoin-related searches.
The Bottom Line
In essence, the Fear & Greed Index is an insightful measure to understand market psychology. While the index quantifies emotions in the market from 0 (extremely fearful) to 100 (extremely greedy), always remember to blend this data with comprehensive research and multiple sources to make well-informed investment decisions.
Related Terms: investor sentiment, stock price, market trends, volatility index.
References
- CNN Business. “Fear and Greed Index”.
- Financial Crisis Inquiry Commission. “Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States”. Page xvi.
- CNN Business. “Investors Are Getting Greedy Again”.
- Alternative. “Crypto Fear & Greed Index”.
