The CNN Fear & Greed Index is one of the key tools for investors. It’s invaluable in informing their perspectives on market sentiment and the emotional and psychological determinants of stock performance. This index uses seven important real estate market indicators to determine their score on a scale of 0-100. A score of 100 means that investors are as greedy as they can get, and a score of 0 means that they are as fearful as possible. By offering a glimpse into prevailing emotional sentiment within the market, the CNN Fear & Greed Index empowers investors to adopt a more rational approach with their decisions.
Though the index uses a composite score calculated from an equal weighting of its seven components, even though investor sentiment can be a fragile thing, all 5 indicators together give a complete picture, providing a better overall picture of the nature of the market. One of the crucial indicators included in the index is “Net new 52-week highs and lows on the NYSE.” This metric reflects the breadth of stock performance, highlighting whether more stocks are reaching new highs or lows, which can signal overall market strength or weakness.
Another significant component is the “Difference in 20-day stock and bond returns.” This indicator measures the relative performance of equities vs. fixed income, offering helpful information about investor risk appetite. Typically, when stocks start to do better than bonds, it shows that there is a greater risk tolerance from investors, or a more greedy animal spirit.
The S&P 500 and its 125-day moving average are among the items the index assesses. When the S&P 500 index trades above its 125-day moving average, it indicates bullish momentum in the overall market. With each new announcement, the trend becomes self-perpetuating, creating a virtuous cycle that raises investor expectations and sends stock prices soaring even higher. When the index drops below this average, it can be an indicator of investor trepidation and caution.
One of the measures in the CNN Fear & Greed Index is “safe haven demand.” This gauge measures the degree to which investors flee to quality stable assets such as gold or government bonds in periods of extreme uncertainty. An increase in safe haven demand typically goes hand-in-hand with an increase in fear on the markets.
Market momentum is another key driver for the index’s bullishness. This component goes a step further by looking deep into the speed of stock price climb or descent, to show strong bullish or bearish market trends. The stronger the momentum, the more it fills investors with confidence and drives away fear. On the other hand, weak momentum tends to increase fears of a bad future market return.
Finally, the index measures “stock price strength.” It decides the rules of the game for how stocks do relative to each other. This is an indicator that can easily be distorted by several large-cap stocks doing very well or very poorly, moving market sentiment in one direction or the other.
The CNN Fear & Greed Index provides one more tool for savvy investors to wield. It allows them to understand the sentiments that are driving the market at any given time. Through understanding these indicators, they identify insights that are highly informative. This enables them to better judge when it’s the best time to buy or sell, given today’s market.