The CNN Fear & Greed Index has been delivering key indicators of the emotional drivers behind the US stock market. Utilizing seven key market indicators, this index measures investor sentiment, assigning each indicator equal weight to calculate a score ranging from 0 to 100. A score of 100 indicates maximum greediness, while a score of 0 signals maximum fear, allowing investors to assess the prevailing emotional climate influencing market dynamics.
The index serves as a tool to answer a pivotal question: What emotion is driving the market now? Through the lens of data on countless elements, it uncovers the reality that sentiment can drive investment decisions and create market movements. Of all of the indicators, market momentum is arguably one of the most telling measures.
Market momentum depends on the seven-day average of the S&P 500’s daily return moving above zero. When the S&P 500 is trading above this moving average, that’s a bullish sign of momentum. This optimism causes investors to be more willing to purchase stocks, thus driving up potential stock price increases. On the other hand, if the index drops below its average, it may be a sign of a bearish trend and increased market prudence.
Like the State Street Investor Sentiment Index, the CNN Fear & Greed Index makes market momentum a central element. It equally weights net new 52-week highs and lows from the NYSE. This breadth measure shows the ratio of stocks making new highs to those making new lows. It provides us a good picture of the total vitality of the market, or lack thereof. It only takes a handful of big stocks to massively distort overall market returns. This serves as a reminder to look beyond great companies and consider underlying market conditions.
Third major element of the index is stock price strength. This indicator measures the ratio between 20-day stock returns and return on bonds. The closer the ratio gets to 1, the more bearish sentiment is indicated. It means that at the margin investors are seeing stocks as more risky investments relative to bonds. This shift in perception can signal increased safe-haven demand, where investors prefer the stability of bonds over the volatility of stocks.
The relationship between stocks and bonds is quite important in this regard. Investors continuously buy and sell thousands of stocks daily, creating a dynamic environment influenced by changing sentiments and market conditions. The CNN Fear & Greed Index can help you understand the emotional turning points in the market. For one, it provides investors with an unfair advantage in understanding how the market responds.
As investors make their way through the current treacherous stock market, understanding these emotional undercurrents is crucial. The index’s ability to distill various indicators into a single score helps investors make informed decisions based on prevailing sentiments. This method allows you to find possible buying and selling opportunities. It deepens your insight into market psychology.