The Fear & Greed Index is a great tool for every investor. Most importantly, it helps them understand the emotional elements that fuel swings in the American market. This fear and greed index uses seven historical market indicators to determine if fear or greed is controlling the market. By calculating a score from 0 to 100, where 100 signifies maximum greed and 0 indicates maximum fear, it provides a snapshot of current investor sentiment.
The Fear & Greed Index uses a variety of factors to measure market sentiment. Specifically, it dives deep into what the S&P 500 is doing relative to its 125-day moving average. This year-over-year comparison is a good measure of market momentum, showing us whether investors are generally more optimistic or pessimistic about future returns. When the S&P 500 is above its rolling average of the last 125 trading days, it indicates strong upward market momentum. This information continues a dangerous trend which indicates that greed has begun to overwhelm investors.
The index is much more than a momentum study. The model looks at net new 52-week highs and lows on the New York Stock Exchange (NYSE) as an indicator of stock price strength. This measure represents the number of stocks reaching new highs relative to those reaching new lows. Beyond that, it’s key to understanding the overall health of the market. Just a few large-cap stocks can have an outsized impact on overall market returns. It’s this last influence that can greatly skew the entire market picture.
One more key piece of the Fear & Greed Index is the analysis of safe haven demand. The index captures the return spread between equities and fixed income over a rolling 20-day window. This unique analysis shows the extent to which investors are clamoring for safety in relationship less risky assets. As stocks are generally considered riskier than bonds, a significant shift toward bond investments may indicate rising fear among investors.
The latest economic developments have fueled these feelings and set the emotional stage for investor decisions. This is despite recent data showing that wholesale inflation was still ironically persistently high for the month of November and sticking at 2.7% in December. Such inflationary pressures can lead to increased caution among investors, further influencing their sentiment as captured by the Fear & Greed Index.
In a chaotic market environment where investor anxiety is running high, knowing how fear and greed fuel emotion can be powerful. This is where the Fear & Greed Index comes in handy—a helpful tool for illuminating these often tumultuous emotional terrains. It treats each indicator the same in its calculations. This combination of fundamental and mint analysis provides a well-rounded lens through which to view unexpected market movements and developments in investor sentiment.
The index’s methodology is a testament to the value of looking beyond one or two signs to evaluate the overall state of a market. It is uniquely driven by rigorous historical comparisons and a wide array of indicators. Its objective is to transparently indicate whether fear or greed is driving investor sentiment right now.