The Fear and Greed Index is still very much a barometer of how people think about the US market. This index uses seven different market indicators to judge investor sentiment. Their responses deliver incredibly important information on their overall mood. It uses 10 indicators to calculate a score—ranging from 0 to 100. This score provides a good sense of overall market conditions at a glance: 100 is the height of greed and 0 is the height of fear.
The best part of the Fear and Greed Index is how it equally weights all seven indicators. This even-handed approach prevents any one aspect from having an outsized impact on the total score. The S&P 500 is the exception among these indicators. It is used to track the performance of 500 of the largest companies in the United States.
The index uses the S&P 500’s 125-day moving average as a measure of market momentum. When the S&P 500 is trading above this moving average, it indicates bullish momentum, indicating that investor confidence is healthy. On the other hand, when the index drops below this average, it usually indicates a negative outlook in the market.
One more important thing to consider, tracked by the Fear and Greed Index, is safe haven demand. This measure looks at the volatility of returns spread between equities and fixed income on a 20-day rolling basis. Since stocks are usually higher risk than bonds, a move into safer investments can be an early warning sign of fear from investors. When safe haven demand increases, it usually means that risk appetite for stocks has decreased.
Used to gauge the underlying strength of stock price movement, the index measures advance-decline statistics of net new 52-week highs and lows. It draws this information from the New York Stock Exchange (NYSE). A large number of new highs is a sign of strong upward momentum for stocks. At the same time, an increase in new lows can be a sign of weakening investor confidence. Just remember that a few big names can have a huge impact on broader market performance. This is the case despite the market being made up of thousands of stocks.
Market participants are regularly obsessed with Fear & Greed Index. As they charge down the marketplace, it is important to understand what they are, what they mean and what they do. The index serves as a useful barometer for gauging investor sentiment. It offers valuable perspectives that can help you develop winning trading strategies and make informed investment decisions.