The S&P 500 just last week skyrocketed above its rolling average of the last 125 trading days. This progressive step marks high-energy, ag-positive maneuvers in the U.S. market. This remarkable turn of events occurs as investors are much more active, with buying and selling thousands of different stocks on average every single day. The Fear & Greed Index, an essential tool for gauging market sentiment, utilizes seven market indicators to answer the question: what emotion is currently driving the market?
The Fear & Greed Index uses a simple average of seven different indicators, giving all seven the same importance. This user-centric approach produces a score between 0 and 100. A score of 100 is the highest level of greediness possible for investors and a score of 0 is the highest level of fear. This index is one of the best measures available for gauging the fear and greed that drive traders’ decisions and market volatility beneath the surface.
The index goes beyond traditional data to include a variety of innovative key indicators. These indicators include net new 52-week highs/lows on the NYSE, market breadth or momentum, and a demand for safe haven assets. It further explores whether stocks have beat bonds more in the last 20 days than ever before. Moreover, it makes the case for robustness of stock prices. By measuring all these aspects with the same importance, the index offers a complete picture of market sentiment.
During the past few weeks, the S&P 500’s continued ability to rise above its 200-day moving average has made headlines and piqued the interest of analysts and investors. This positive momentum bodes well for future investor confidence, as it signals the start of positive trends taking shape. As we have advised investors, stock market levels are best understood by comparing current month-end results to the prior month to most accurately assess overall performance.
Additionally, any ratio above 1 is deemed bearish, meaning that investors could be slowly moving in the direction of fear instead of greed. This ratio is another layer of analysis that can be helpful for anyone tracking changing market conditions. By triangulating multiple different metrics, investors can build a better understanding of the risks and potential rewards at play in the market.
The dynamic between stocks and bonds is another key aspect to this unique market dynamic. In other words, stocks are just riskier investments than bonds. Through this lens, changes in investor sentiment suddenly have an outsized effect on the efficacy of various asset allocation strategies. When safe haven demand increases, it usually serves as a leading indicator of mounting investor unease. This increased anxiety propels them to invest in safer, low-yielding assets such as bonds.
In a world where thousands of stocks trade every day. All this buying and selling activity creates the delicate ecosystem that is the overall market landscape. This is where the Fear & Greed Index comes into play. Most importantly, it captures the sentiments that drive speculative behavior in trading. Investors can use this data to move the needle further and faster by making more proactive risk-return based portfolio decisions.
The significance of market momentum can be seen by looking at the S&P 500 compared to its 200-day moving average. When the S&P 500 is able to stay comfortably above this benchmark, it’s usually indicative of a strong underlying environment for stocks. On the flip side, if it falls below, it can be a warning of troubles to come.