Fear And Greed Index
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 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).
Articles Of Interest
Learn how to stop using emotion and bad habits to make your stock picks.
If these unpleasant emotions are allowed to influence your decision-making, they may cost you dearly.
Positive and negative trading experiences can affect the way you trade. Find out how.
Fear of breaking out of a comfort zone can prevent an investor from reaching his or her full potential.
In the finance world, October is a month to be feared, but is it justified?
Learn to pounce on the opportunity that arises when other traders run and hide.
The Consumer Confidence Index is the result of a monthly survey of 5,000 U.S. households by the Conference Board that measures how optimistic or pessimistic consumers are about the economy's ...
The wealth effect is a psychological phenomenon that causes people to spend more as the value of their assets rises. The premise is that when consumers' homes or investment portfolios increase ...
The PMI is the headline indicator in the ISM Manufacturing Report on Business, an influential monthly survey of purchasing and supply executives across the United States. The acronym PMI stood ...
For many investors, the Philly Fed's monthly manufacturing survey provides important clues about the direction of the economy. But trading on the monthly report is probably best left to the professionals ...