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.

BREAKING DOWN '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).

RELATED TERMS
  1. Trading Psychology

    The emotions and mental state that dictate success or failure ...
  2. Market Psychology

    The overall sentiment or feeling that the market is experiencing ...
  3. Overstay

    The act of holding an investment for too long. It often occurs ...
  4. Index

    A statistical measure of change in an economy or a securities ...
  5. Price-Weighted Index

    A stock index in which each stock influences the index in proportion ...
  6. Emotional Neutrality

    The concept of removing greed, fear and other human emotions ...
Related Articles
  1. Forex Education

    Step 9: Keep Emotions At Bay

    Want to invest but don't know where to start? Learn how to make your money work for you with these tips.
  2. Active Trading

    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.
  3. Markets

    The Fear And Greed Cycle Lives On

    The last few years in the market have been an interesting experiment in psychological conditioning and overall complacency. Despite the bad news in the markets and overall economy.
  4. Professionals

    Domestic vs. Global Indexes

    CFA Level 1 - Domestic vs. Global Indexes. Learn the differences between domestic and global indexes. Provides examples of each, including bond and composite indexes.
  5. Active Trading Fundamentals

    10 Timeless Rules For Investors

    Find out what most investors are doing wrong, and how you can do it right.
  6. Forex Education

    No.6. Fear and greed are stronger than long-term resolve.

    Find out what most investors are doing wrong, and how you can do it right.
  7. Investing Basics

    The Pros and Cons of Indexes

    Learn about the advantages and disadvantages of stock indexes and passive index funds. Discover how there is an opportunity cost to using index funds.
  8. Professionals

    Average Market Returns

    We look at the major indexes and their average yearly returns.
  9. Investing Basics

    Loving Your Stocks? Don't Take This Cliché To Heart

    The advice not to fall in love with one's stocks is common, even a cliché. However, the prevalence of this phenomenon is probably overstated by financial journalists. More common is that investors ...
  10. Forex Education

    No.2. Excesses Lead To An Opposite Excess

    Overcorrection is to be expected in the markets.
RELATED FAQS
  1. What bond indexes follow the supply and demand for junk bonds?

    Learn about indexes that track junk bonds, why junk bonds pay more interest than other types of bonds, and how these bond ... Read Answer >>
  2. What are the most common market indicators to follow the European stock market and ...

    See which market indicators and major market indexes are used most frequently by traders and analysts to measure the European ... Read Answer >>
  3. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  4. Is it possible to invest in an index?

    First, let's review the definition of an index. An index is essentially an imaginary portfolio of securities representing ... Read Answer >>
  5. How do indexes determine which stocks are removed or added to them?

    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
  6. How can I tell if I'm an emotional investor?

    Successful investors possess the important trait of emotional stability, which means that they base their investment decisions ... Read Answer >>
Hot Definitions
  1. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  2. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  3. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  4. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  5. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  6. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
Trading Center