BasicsInformative

Fear and Greed Index (Understanding Investor Sentiments)

Written by Vanshika Kothari
Sun Jul 04 2021
Fear & Greed Index
See how MarketXLS helps you take advantage in the markets.
Download Option Templates →
Fear & Greed Index
 

Investor sentiments play a significant role in driving the market prices, direction, volatility, and volume. Hence, tracking these sentiments and emotions of investors becomes essential. Developed by CNN Money, the Fear & Greed Index measures two main emotions that influence how much investors are inclined to pay for stocks. 

The fear & greed index is measured on the basis of seven different factors. Each factor is equally weighted and gauged from 0 to 100 and to generate the index value. Thus, in theory, the Index can gauge whether the stock market is reasonably priced. 

Understanding the Index

Excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect is the underlying logic behind the Index.

People tend to get FOMO (Fear of missing out) which makes them greedy when the market is rising. Quite often, it is also seen that people sell their holdings in the irrational reaction to seeing red numbers. With the help of the Fear & Greed Index, you can be saved from your own emotional overreactions. There are two simple things assumed:

  1. Extreme fear can signal that investors are too worried, which could be a buying opportunity.
  2. When Investors are too greedy, that means the market is due for a correction.

Calculation of the Index

IPA0nOs4oBKojX5e_kWQC2SH5Lx7sXACUni7FcWgsq1N_w” alt=”Fear & Greed Index”/>

From: https://corporatefinanceinstitute.com/ 

As described earlier, the fear & greed index is calculated based on seven different factors – each factor is gauged from 0 to 100 and equally weighted to generate the index value.

  1. Stock Price Strength

This factor is a ratio of the number of stocks on the New York Stock Exchange (NYSE) reaching 52-week highs relative to reaching hitting 52-week lows. A greater number of 52-week lows indicates versus 52-week highs indicates fear and vice versa.

  1. Stock Price Breadth

Stock Price Breadth is based on the trading volumes  of rising stocks relative to declining stocks on the NYSE. A greater volume of rising stocks versus declining stocks indicate greed and vice versa.

  1. Market Momentum

Momentum is the speed of price changes in stock. The performance of the S&P 500 relative to its 125-day average measures the market momentum. A higher performance relatively indicates greed and vice versa.

  1. Put and Call Options

The extent to which call options lag behind put options, signifying fear, or surpass them, indicating greed.

  1. Safe Haven Demand

Bonds are usually considered safer compared to stocks. Better performance of bonds relative to the performance of stocks indicates fear and vice versa.

  1. Junk Bond Demand

The greater yield spread between investment-grade bonds and junk bonds indicates fear and vice versa. 

  1.  Market Volatility

 A higher value of the Chicago Board Options Exchange Volatility Index (VIX) concentrating on a 50-day Moving Average indicates fear and vice versa.

The Bottom Line

Historically, the fear & greed index has been a reliable indicator of a significant change in equity markets. It can be a great tool to time entry and exit in the market. As stated by Warren Buffett, “Be fearful when others are greedy, and greedy when others are fearful.” The fear & greed index can help investors understand the general sentiment and act accordingly on their trades. 

Most experts agree on a buy-and-hold strategy to be the best way of seeing returns in a portfolio over the long term. Arguably, tools such as the fear & greed index encourage investors to frequently trade in and out of stocks and generate less favorable returns.

Disclaimer

All trademarks referenced are the property of their respective owners. Other trademarks and trade names may be used in this document to refer to either the entity claiming the marks and names or their products. MarketXLS disclaims any proprietary interest in trademarks and trade names other than its own, or affiliation with the trademark owners.

None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made.

References

Fear and Greed Index – Overview, Calculation, Example

Fear and Greed Index Definition

Fear & Greed Index – Investor Sentiment

Interested in building, analyzing and managing Portfolios in Excel?
Download our Free Portfolio Template
Download Option Templates

Top 100 Gainers Today

Top 100 losers Today

Real gdpReal personal consumption expReal private investmentReal govt expenditureReal net exportsReal exportsReal importsFederal receiptsFederal outlaysFederal surplus or deficitFederal debtReal private investment nonresidentialReal private investment residentialReal potential gdpReal personal incomeReal personal consumption exp monthlyRpce durable goodsRpce nondurable goodsRpce servicesPersonal savings rateMonetary baseCurrency in circulationBank reservesMoney supply m1Money supply m2Sp500DjiaWilshire indexVixFinancial stress indexCorporate bond index aaCorporate bond index bbbFederal funds rateTreasury rate 3mTreasury rate 1yTreasury rate 5yTreasury rate 10yTips 5yTips 10yBond yield aaaBond yield baaMortgage rate 15yMortgage rate 30yUs dollar weighted averageUsdollar to euroUsdollar to poundYuan to usdollarCanadiandollar to usdollarYen to usdollarCpiCpi wo food energyCpi foodCpi energyChain price indexChain price index wo food energyGdp price deflatorPpi final demandPpi finished goodsPpi materialPpi crude goodsPpi final demand wo food energyPpi finished goods wo food energyHouse price indexHouse price index 20cityCrude oil priceGasoline priceNatural gas priceIndustrial productionCapacity utilisationInventoriesSales retail foodVehicle sales light weightManufacture orders durablesManufacture orders capital goodsLoansConsumer credit outstandingCorporate profitsHousing startsBuilding permitsResidential constructionEmployees nonfarmEmployees privateEmployees goods producingEmployees service providingEmployees governmentUnemployment rateInitial cliamsAverage weeks unemployedJob openingsHiresSeparationsQuitsLayoffs dischargesHours of productionHourly earningsReal outputPopulationLabor forceLabor force participation rate
Search for a stock

Top MarketXLS Rank stocks

Booz Allen Hamilton Holding Corporation logo

Booz Allen Hamilton Holding Corporation

92.84
 
USD
 
2.48
 
(2.74%)
84
Rank
Optionable: Yes
Market Cap: 11,592 M
Industry: Business Services
52 week range    
69.32   
   93.45
Rush Enterprises Inc. Class B Common Stock logo

Rush Enterprises Inc. Class B Common Stock

51.55
 
USD
 
1.94
 
(3.91%)
81
Rank
Optionable: No
Market Cap: 2,753 M
Industry: Auto & Truck Dealerships
52 week range    
35.64   
   57.55
BWX Technologies Inc. logo

BWX Technologies Inc.

56.44
 
USD
 
1.35
 
(2.45%)
80
Rank
Optionable: Yes
Market Cap: 4,846 M
Industry: Aerospace & Defense
52 week range    
42.22   
   61.75
Ritchie Bros. Auctioneers Incorporated logo

Ritchie Bros. Auctioneers Incorporated

67.49
 
USD
 
2.43
 
(3.74%)
77
Rank
Optionable: Yes
Market Cap: 6,928 M
Industry: Business Services
52 week range    
48.44   
   75.28
Ituran Location and Control Ltd. logo

Ituran Location and Control Ltd.

24.33
 
USD
 
-0.16
 
(-0.65%)
77
Rank
Optionable: Yes
Market Cap: 504 M
Industry: Communication Equipment
52 week range    
19.49   
   29.33
General Mills Inc. logo

General Mills Inc.

75.79
 
USD
 
0.34
 
(0.45%)
76
Rank
Optionable: Yes
Market Cap: 42,311 M
Industry: Packaged Foods
52 week range    
55.38   
   75.96
CRA InternationalInc. logo

CRA InternationalInc.

89.15
 
USD
 
-0.17
 
(-0.19%)
76
Rank
Optionable: Yes
Market Cap: 646 M
Industry: Business Services
52 week range    
78.05   
   115.47
ConAgra Brands Inc. logo

ConAgra Brands Inc.

34.56
 
USD
 
0.32
 
(0.93%)
76
Rank
Optionable: Yes
Market Cap: 16,287 M
Industry: Packaged Foods
52 week range    
29.80   
   36.67
Agree Realty Corporation logo

Agree Realty Corporation

73.53
 
USD
 
1.40
 
(1.94%)
76
Rank
Optionable: Yes
Market Cap: 5,522 M
Industry: REIT - Retail
52 week range    
60.78   
   74.67
International Money Express Inc. logo

International Money Express Inc.

21.77
 
USD
 
1.30
 
(6.35%)
75
Rank
Optionable: Yes
Market Cap: 781 M
Industry: Business Services
52 week range    
14.66   
   22.86

More Features

Stand with Ukraine

As the situation in Ukraine escalates, many of us in MarketXLS are left with emotions too overwhelming to name. If you’d like to show your support, but aren’t sure how to, we want to help make it easier for you to act.

For any amount donated, we’ll extend your MarketXLS subscription for double of the donated amount. Please send proof of your payment to support@marketxls.com to avail the extention

From all of us at MarketXLS, thank you!