One of my favorite indicators to use as a long-term bull or bear gauge is the Fear & Greed Index. This is the first index based on seven different available market indicators. It provides investors and analysts with deep strategic value from insights into the emotions that move markets. Its score, which goes from 0 to 100, is a window into investor sentiment. Specifically, a score of 100 reflects the height of greediness, whereas a score of 0 reflects the height of fear.
The Fear & Greed Index gives every indicator equal weight. This method ensures that only stable market conditions are positively represented. Among these indicators is the S&P 500, one of the most well-known and closely watched barometers of the U.S. equity market. Today, the index uses the S&P 500’s 125-day moving average to serve as an indicator of overall market momentum. When the S&P 500 is trading above this moving average, it’s a sign of bullish momentum. This continuing trend could be an indication that investor confidence is starting to return.
The third most important part of the Fear & Greed Index is its gauge of safe haven demand. This component measures the excess return of stocks over bonds using a 20-day rolling window. Stock investments are typically considered riskier than bond investments. When demand for safe havens like bonds is soaring, it’s usually because investors are getting spooked. Reduced demand for safe havens could be associated with greater risk appetite and a stronger preference for equities.
Stock price strength is another important component of the Fear & Greed Index. This is gauged by measuring net new 52-week highs and lows posted daily on the New York Stock Exchange (NYSE). A surge in new highs typically reflects robust market health, while an increase in new lows may suggest underlying weakness. Effects of cap-weighting returns from just a handful of large-cap stocks can disproportionately move overall market performance. That’s a pretty big influence and can easily distort the sentiment that the index is attempting to communicate.
This index’s design enables it to capture the complexity of a dynamic market. By focusing on a range of different indicators, it creates a more nuanced picture of investor sentiment. This three-pronged strategy equips regulators and investors to make better decisions that reflect the current state of the market.
Needless to say, paying attention to the Fear & Greed Index is essential for a successful investing experience. This tool is your best opportunity to understand what today’s hottest market looks like. Just as important, it offers an early window into where the market is headed in the coming months. As market conditions change, the index’s score changes—an indicator of the state of investor confidence and market risk tolerance.