The Fear & Greed Index is a tool used to gauge investor sentiment and assess the prevailing emotion driving market movements. It is based on the premise that excessive fear will lead to lower stock prices, while excessive greed will drive prices higher. The index is calculated using seven different indicators, which are equally weighted to provide a composite score ranging from 0 to 100. Here's a detailed explanation of the components that make up the Fear & Greed Index:
- Market Momentum: This indicator measures the performance of the S&P 500 against its 125-day moving average. A higher S&P 500 value than the moving average indicates positive momentum, which is associated with greed, while a lower value suggests negative momentum and fear1.
- Stock Price Strength: The number of stocks on the NYSE at 52-week highs is compared to those at 52-week lows. A higher number of highs indicates a bullish sentiment and reflects greed, while more lows suggests a bearish sentiment and fear1.
- Stock Price Breadth: The Fear & Greed Index uses the McClellan Volume Summation Index to assess the trading volume of rising versus declining stocks. Increasing volume in rising stocks indicates a bullish sentiment and reflects greed, while declining volume suggests a bearish sentiment and fear1.
- Put and Call Options: The 5-day average put/call ratio is used to gauge investor sentiment. A higher ratio indicates a greater number of puts, which are used for hedging against price declines, suggesting fear. Conversely, a lower ratio reflects a greater number of calls, which are used for hedging against price rises and indicates greed1.
- Market Volatility: The CBOE Volatility Index (VIX) is used to measure market volatility. A higher VIX value indicates increased fear, while a lower value suggests a more stable market and reflects greed1.
- Safe Haven Demand: This indicator compares the performance of stocks versus Treasury bonds. A higher stock performance relative to bonds indicates a bullish sentiment and reflects greed, while a lower stock performance suggests a bearish sentiment and fear1.
- Junk Bond Demand: The spread between yields on investment-grade bonds and junk bonds is used to assess junk bond demand. A wider spread indicates lower demand for junk bonds, which is associated with fear, while a narrower spread suggests higher demand and reflects greed1.
The Fear & Greed Index provides insights into market sentiment, with scores indicating the prevailing emotion driving market movements. A score below 50 suggests a bearish sentiment, while a score above 50 indicates a bullish sentiment. The index is useful for investors to help time their entries and exits from the market, as it provides a snapshot of market sentiment that can influence investment decisions23.
8/24/2024 11:21am
