最後更新日期：2023年09月08日
The Fear and Greed Index is a widely recognized concept among investors. It serves as an indicator to gauge market sentiment and predict short-term market movements. In this article, Growin will delve into the factors contributing to short-term market fluctuations and provide insights into how Growin’s Fear and Greed Index can aid investors in navigating potential risks.
What causes market fluctuations?
Market fluctuation refers to the situation where the price of a certain asset in the market experiences ups and downs or fluctuations within a specific period of time. These fluctuations can involve both upward and downward movements and may vary in terms of speed – some could be rapid while others are gradual. The table below presents five main reasons of short-term market fluctuations for your reference:
| Reasons of Short Term Market Fluctuation | Frequently Occurring Issues | Impact on the Market | Strategies to Resist |
| Changes in the Macroeconomic and Political Environment | Wars, terrorist attacks, trade wars, financial crises, etc. | Could lead to market instability and a decline | Investors could consider increasing their cash reserves or holding relatively value-protecting assets, such as gold, treasury bonds, etc. |
| Company Performance and News | Results Announcement, Product Release, Vote of Shareholders, Change of Management, etc. | Might lead to volatility in a single stock or a specific industry | Investors might choose to diversify their investments and not be excessively reliant on a single stock or industry |
| Risk of Foreign Currency | Foreign exchange may lead to changes in export and import prices | Might have an impact on specific sectors, e.g. export-oriented enterprises | Investors could focus on the exchange rate risk of specific industries and adopt hedging strategies in response |
| Change in Interest Rates | Rising or falling in interest rates may have an impact on the market | It is likely to have an impact on specific industries or markets, e.g. real estate, banking, etc. In addition, interest rate adjustments might also affect changes in the market’s valuation of companies. | Investors could adjust their investment portfolios according to changes in interest rates. For example, re-weighting their capital in fixed-income products. |
| Investor Expectations | Reacting via some market internals , e.g. VIX, p/c ratio, capital flows, etc. | Might affect the technical aspects of the market and investor sentiment | Investors could pay attention to the changes in market technicals and related indicators and adjust their investment strategies. |
How to Manage Risk in a Volatile Market?
Market risk pertains to the potential of experiencing losses due to significant market volatility. Market fluctuations can have repercussions on various investment vehicles, including stocks, bonds, derivatives, and more. Consequently, investors need to employ tactics aimed at mitigating this risk. The subsequent section outlines five prevalent investment strategies and approaches to risk management:
| Investment Strategies | Investment Methods |
| Diversification | Invest in different kinds of assets, including stocks, bonds, commodities, etc., to minimize the risk of single asset volatility. |
| Periodic Portfolio Adjustment | Evaluate the asset allocation of your investment portfolio regularly and make adjustments according to changes in market conditions. |
| Stop Order | Limit losses by setting a stop-loss price and automatically selling when the value of an invested asset falls below that. |
| Options | Purchase short duration put options to protect the portfolio from market declines. |
| Risk Management Program | Setting up a risk management program to identify risk tolerance, limits, etc., and strictly enforce them during periods of market volatility. |
How to Utilize Growin Fear and Greed Index to Capitalize on Market Fluctuation?
1. Recognize the current market sentiment, especially when it’s at an extreme.
As depicted below, the Growin Market Fear and Greed Indicator presents the present Fear and Greed Index on the left segment of the chart, enabling investors to swiftly determine if the market is currently experiencing extreme sentiment. The opposite side of the chart displays the most recent signals over the past five days.
Further reading：WHAT IS THE FEAR & GREED INDEX? COMPOSITION OF THE CNN & GROWIN’S FEAR & GREED INDEX? INVESTMENT DECISIONS ?
2. Timing the market Reversal.
Backed by historical backtesting, Growin’s Fear and Greed Index can also provide insights into the optimal timing for executing counter-trend trades. The fundamental principle is to act opposite to the prevailing extreme sentiment.
For example：
- When the market reverses from a state of “extreme greed,” wherein everyone is optimistic and buying into the market, but subsequently the buying momentum diminishes, there’s a notable probability of an upcoming downtrend.
- Conversely, when the market pivots from a phase of “extreme fear,” where everyone is bearish and selling, and then the selling pressure abates, there’s a considerable chance of an impending uptrend.
The aforementioned reversal signals are mainly based on the historical statistical backtesting results from 2007 to present, encompassing metrics like percentage of increase, average PE, average return, and more. Consequently, you have the option to incorporate quantitative data as a foundation for decision-making, rather than solely relying on intuition.
For example, we can see from the table above:
- When the indicator reaches 5 and subsequently reverses (Extreme Greed Relief), the average return over the following 5 days is -0.8%, and the win rate is only 33.33%. This suggests that when the market experiences a scenario where everyone is actively buying and no significant buying potential remains, the market is inclined to revert back to the mean in the short term.
- For investors considering a long trade, it is advisable to monitor the situation closely rather than entering immediately.
- When the indicator reaches -5 and subsequently reverses (Extreme Fear Relief), the average return over the following 5 days is 1.3%, and the win rate is 65.79%. This suggests that when the market experiences a scenario where everyone is actively selling and no significant selling potential remains, the market is inclined to rally in the short term.
- For investors considering a long trade, it is advisable to contemplate entering the market to take advantage of the short-term rally.
Here is an example of an Extreme Sentiment Reversal Strategy that take into account buying and selling decisions based on extreme fear (-5 points) and extreme greed (5 points):
【Trading Rules】
- When a reversal of -5 points occurs (Extreme Fear Relief), there is a high probability of a rebound. Therefore, the strategy involves holding the S&P 500 ETF (represented by SPY) for a period of five days.
- When a reversal of 5 points occurs, it’s likely that the market will experience a pullback. During this phase, the strategy involves shorting the market (represented by holding a short position in the S&P 500) for a duration of five days.
- Others: maintaining a cash position.
| Strtegy | times | wining rate | AverageReturn | Profitper winning trades | Loss per losing trade | First Quartile | SecondQuartile | Third Quartile |
| Extreme Sentiment Reversal Strategy | 42 | 64.29% | 1.14% | 3.44% | -2.99% | -1.10% | 1.25% | 4% |
Conclusion
When investors reference the Fear & Greed Index, they often recognize that heightened greed sentiment can result in increased market volatility. This is due to the tendency of investors to become overly enthusiastic in buying, driving prices up and potentially leading to market bubbles.
Conversely, when fear sentiment prevails among investors, market volatility can also intensify. This is attributed to the inclination of investors to engage in excessive selling, causing prices to decline. Such actions can trigger panic selling by other investors, amplifying market fluctuations.
Therefore, during periods of volatile market sentiment, it becomes even more crucial for investors to thoroughly assess their existing investment strategies. Incorporating historical backtesting data can serve as a foundational tool for shaping investment approaches.
Furthermore, investors should closely analyze a stock’s intrinsic value, trend, and whale interest, among other factors. By adopting this approach amid market fluctuations, investors can prudently identify potential investment opportunities and strive to achieve more consistent returns.
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