As an investor, have you ever felt yourself swayed by changes in market sentiments, worried about potential losses in your investments, or experienced the fear of missing out (FOMO) on market movements? These are all human weaknesses that investors must overcome. In such situations, utilizing the “Fear and Greed Index” can be highly beneficial. It can help you better control your investment emotions, find a balance between investing and psychology, and make more informed decisions.
What is the Greed Index? How are the values of the Fear & Greed Index defined?
The primitive Fear and Greed Index (also known as the “Greed Index,” “Fear Greed Panic Index,” or “Panic Index”) is developed by CNN Business, a division of Cable News Network (CNN). It utilizes various indicators such as stock prices, volatility, trading volume, and more to calculate a composite index that reflects investors’ sentiment and psychological state towards the market.
The CNN Fear and Greed Index ranges from 0 to 100, where higher values indicate a more greedy market sentiment, while lower values signify a more fearful market sentiment. When the Fear and Greed Index is below 20, it signifies an extremely fearful market condition, urging investors to be cautious. On the other hand, when the index exceeds 80, it indicates an excessively greedy market sentiment, prompting investors to exercise even greater caution.
How is the CNN Fear & Greed Index composed?
The CNN Fear & Greed Index is primarily composed of the following 7 indicators, which reflect market sentiment and trends. These seven indicators can be used to assess market risk and investor outlook on the stock market’s prospects:
|Junk Bond Demand||A smaller difference (or spread) between yields for junk bonds and safer government bonds is a sign investors are taking on more risk.|
|Stock Price Momentum／Market Momentum||It’s useful to look at stock market levels compared to where they’ve been over the past few months. The Fear & Greed Index uses slowing momentum as a signal for Fear and a growing momentum for Greed.|
|Put and Call Option||A ratio above 1 is considered bearish. The Fear & Greed Index uses a bearish options ratio as a signal for Fear.|
|Market Volitility||It tends to be lower in bull markets and higher when the bears are in control. The Fear & Greed Index uses increasing market volatility as a signal for Fear.|
|Stock Price Breadth||This measure looks at the amount, or volume, of shares on the NYSE that are rising compared to the number of shares that are falling.|
|Safe Heaven Demand||It shows the difference between Treasury bond and stock returns over the past 20 trading days.|
|Stock Price Strenth||It shows the number of stocks on the NYSE at 52-week highs compared to those at 52-week lows.|
|Reference：Fear and Greed Index – Investor Sentiment | CNN|
How to use the Fear & Greed Index?
Once understanding about the composition of the CNN Fear & Greed Index, we have compiled the following table based on the correlation between the index’s levels and market sentiment, along with the common actions used by most market investors. Investors can refer to this table to assess market risks and opportunities, as well as to formulate appropriate entry and exit strategies. When market sentiment leans towards extreme greed, investors may consider reducing investments or exiting positions. Conversely, when market sentiment tends towards extreme fear, investors might contemplate increasing investments and seeking undervalued stocks.
|CNN Fear & Greed Index||Market Sentiment||MarketSituation||InvestmentStrategy|
|0-25||extremefear||The market might be experiencing excessive panic, potentially presenting value investment opportunities.||Increase investments and search for undervalued stocks.|
|26- 44||fear||The market might be at a low point, potentially presenting investment opportunities.||Consider increasing investments and search for undervalued stocks.|
|45 – 55||neutral||The market could be relatively stable, requiring further assessment.||Choose entry and exit points based on individual risk tolerance.|
|56 – 74||greed||The market might be at a high point, and need to be cautious about risks.||Maintain vigilance, slow down investment pace.|
|75 – 100||extremegreed||The market might be overheated, and need cautious investing.||Reduce investments or exit the market.|
Growin’s Powerful Fear & Greed Index
In addition to the CNN Fear and Greed Index, which offers a snapshot of current market conditions, investors looking for more nuanced insights into market sentiment can turn to the exclusive Fear and Greed Index developed by the Growin team. Ideal for those aiming to capture signals of extreme sentiment shifts, this advanced index also provides quantitative backtesting data to support your investment decisions.
Swiftly grasp the latest market signals to clarify the current market condition
From the left side of the illustration, you can quickly observe the latest market signals, while the right side shows the scores of the last five signals, offering insight into the recent market trends.
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Strategies to Different Scores on Growin Fear and Greed Index
Investors using the Growin Fear & Greed Index can also assess the current market sentiment by observing the current score within the range of -5 to 5. This allows you to understand whether the market is in an extreme state based on the score’s position within this range.
The following table offers market scenarios and entry/exit strategies corresponding to different scores of the Growin Fear & Greed Index:
|Growin Fear & Greed Index||Market Sentiment||MarketSituation||InvestmentStrategy|
|-5 to -4||extremefear||The market might be experiencing excessive panic, which could potentially lead to rapid rebound opportunities.||Seize the market condition of extreme fear, ranging from -5 to -4. Evaluate the opportunity to increase positions and identify undervalued potential assets.|
|-3 to -2||fear||The market might be at a low point, potentially presenting investment opportunities.||Consider increasing investments and search for undervalued stocks.|
|-1 to 1||neutral||The market could be relatively stable, requiring further assessment.||Choose entry and exit points based on individual risk tolerance.|
|2 to 3||greed||The market might be at a high point, and need to be cautious about risks.||Maintain vigilance, slow down investment pace.|
|4 to 5||extremegreed||The market might be overheated, and need cautious investing.||Exercise caution in the market condition of extreme greed, with scores ranging from 4 to 5 . Evaluate the possibility of taking profits and closing out positions.|
In the chart below, we see that a score of -4 on the Growin Fear & Greed Index indicates a state of extreme market fear. By effectively interpreting these signals and applying the entry and exit strategies we’ve outlined, investors can capitalize on these emotional extremes. Interestingly, the chart also shows that following periods of extreme fear, as indicated by the Fear & Greed Index, the S&P 500 has typically seen an uptrend. For an in-depth look at reversal trading strategies leveraging the Growin Fear & Greed Index, please click here. 🔗
What factors are considered behind the Growin Fear and Greed Index?
The Growin Fear and Greed Index primarily takes into consideration the following five factors for its composition. We can understand each factor from the table below and observe the correlation trends between each factor and the S&P 500 over the past year:
five days average of put-call ratio
|five days average of put-call ratio||The put-call ratio, calculated by dividing open interest in put options by call options, indicates market sentiment. A ratio above 1 suggests bearish sentiment, with more put options indicating market pessimism. Conversely, a ratio below 1 reflects bullish sentiment, as more call options signify market optimism.||The five-day moving average of the put-call ratio is observed to reduce noise. A value above 1.2 signifies elevated market fear, while below 0.8 indicates increased market greed. These extremes often foreshadow potential reversals.|
1 month VIX/ 3 monthVIX
|1 month VIX/3 monthVIX||The Volatility Index (VIX) is compiled by the Chicago Board Options Exchange (CBOE) based on the option prices, commonly referred to as the “Fear Index.”||By comparing the one-month and three-month moving averages of the VIX, market volatility can be observed. A ratio above 1 indicates relatively higher recent market volatility. When the ratio exceeds 1.1, it signifies increased market fear, while below 0.9 suggests elevated market greed. These extremes often precede potential reversals.|
The difference between long and short positions
|The difference between long and short positions||The difference between long and short positions is calculated by subtracting the number of positive returns from negative returns of S&P 500 component stocks over the past five days.||When this value is greater than 200, it signifies increased market greed, while a value less than -200 indicates heightened market fear. These extreme conditions often anticipate potential reversals.|
|Capial Flow||Capital flow is the difference in average returns between cyclical and defensive asset classes.||When this value is greater than 3%, it indicates increased market greed, while a value less than -3% suggests heightened market fear. These extreme conditions often foreshadow potential reversals.|
S&P 500 bias ratio
|S&P 500 bias ratio||S&P 500 bias refers to the degree of deviation between stock prices and their moving average. It is used to assess the extent of market overbought or oversold conditions, aiding in the determination of potential market trends.||By observing the S&P 500 bias ratio, when the bias is greater than 3%, it indicates increased market greed, while a bias less than -3% suggests heightened market fear. These extreme conditions often herald potential reversals.|
Reduce Market Anxiety with Effective Use of the Growin Fear & Greed Index
In recent years, various market news such as pandemics, interest rate inflation, the closure of FTX exchange, and the recent Silicon Valley Bank (SVB) incident have inundated our lives. This barrage of information often stirs our emotions and influences investment decisions. During such times, in addition to subjective judgments based on news, integrating the Growin Fear and Greed Index along with backtesting data can help investors strike a balance between market sentiment and rational data. This will not only enhance your understanding of market trends but also sharpen your ability to seize lucrative investment opportunities.
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