Fear And Greed Index

Filed Under »
Dictionary Says

Definition of 'Fear And Greed Index'

An index developed and used by CNNMoney to measure the primary emotions that drive investors: fear and greed. The Fear and Greed Index is based on seven indicators:

1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average

2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE

3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.

4. Put and Call Options - based on the Put/Call ratio

5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds

6. Market Volatility - as measured by the CBOE Volatility Index or VIX

7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries

Each of these seven indicators is measured on a scale from 0 to 100, with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.

Investopedia Says

Investopedia explains 'Fear And Greed Index'

The Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values, while unbridled greed can result in stocks being bid up far above what they should be worth.

The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3).

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. VIX - CBOE Volatility Index

    The ticker ...
  2. Market Breadth

    A technique used ...
  3. 52-Week High/Low

    The highest and ...
  4. Advance/Decline Line - A/D

    A technical ...
  5. Risk Measures

    Statistical ...
  6. Put-Call Ratio

    A ratio of the ...
  7. Relative Strength Index - RSI

    A technical ...
  8. Breadth Indicator

    A mathematical ...
  9. Business Cycle Indicators - BCI

    Composite of ...
  10. Blue Chip Indicator

    A formal gauge ...

Articles Of Interest

  1. The Financial Markets: When Fear And Greed Take Over

    If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly.
  2. Removing The Barriers To Successful Investing

    Learn how to stop using emotion and bad habits to make your stock picks.
  3. Traders: Profit From Other Investors' Fear

    Learn to pounce on the opportunity that arises when other traders run and hide.
  4. October: The Month Of Market Crashes?

    In the finance world, October is a month to be feared, but is it justified?
  5. Break Out Of Your Comfort Zone And Win

    Fear of breaking out of a comfort zone can prevent an investor from reaching his or her full potential.
  6. Using Feedback To Improve Your Trading

    Positive and negative trading experiences can affect the way you trade. Find out how.
  7. Revenue Projections Show Profit Potential

    Examining how a company makes money can offer clues about its earnings potential.
  8. Is Your Stock Headed South?

    Don't let your portfolio go with it! Find out which signs to watch out for.
  9. 3 Industry-Impacting Innovations On The Horizon

    Here are some industry-impacting innovations that could potentially belong in the famed Carousel of Progress.
  10. Trading The Non-Farm Payroll Report

    Discover how to trade the NFP report without getting knocked out by the irrational volatility it can create.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center