The Fear and Greed Index, developed by CNN Business, measures investor sentiment and helps determine whether stocks are fairly valued.

How is the Fear and Greed Index Calculated?

The index is calculated daily, weekly, monthly, and annually, using an equal-weighted average of seven key indicators that assess different aspects of stock market behavior:

1. Price Momentum

   • Compares the S&P 500’s performance to its 125-day moving average.

   • Above the average → Signals greed.

   • Below the average → Signals fear.

2. Stock Price Strength

   • Measures the number of stocks hitting 52-week highs vs. 52-week lows on the NYSE.

   • More highs → Indicates greed.

   • More lows → Indicates fear.

3. Stock Price Breadth

   • Uses the McClellan Volume Summation Index, which compares advancing stock volume to declining stock volume.

   • High advancing volume → Signals greed.

   • Low advancing volume → Signals fear.

4. Put and Call Options

   • Examines the 5-day average ratio of put options to call options.

   • Ratio above 1 → Signals fear (investors hedging risk).

   • Ratio below 1 → Signals greed (investors taking risks).

5. Market Volatility

   • Compares the CBOE Volatility Index (VIX) to its 50-day moving average.

   • VIX above its average → Signals fear.

   • VIX below its average → Signals greed.

6. Safe Haven Demand

   • Assesses the 20-day returns of stocks vs. Treasury bonds.

   • Investors moving to Treasuries → Indicates fear.

   • Increase in stock returns vs. bonds → Indicates greed.

7. Junk Bond Demand

   • Measures the spread between government bond yields and junk bond yields.

   • Smaller gap (preference for riskier bonds) → Indicates greed.

   • Wider gap (shift to safer bonds) → Indicates fear.

How is the Fear and Greed Index Interpreted?

The index operates on the premise that:

• Extreme fear can lead to undervalued stocks.

• Extreme greed can lead to overvalued stocks.

It uses a scale from 0 to 100, categorized as follows:

Score RangeMarket Sentiment0 - 24Extreme Fear25 - 44Fear45 - 55Neutral56 - 75Greed76 - 100Extreme Greed

Conclusion

While the Fear and Greed Index provides valuable insight into market sentiment, it should not be used as a standalone investment tool. As a lagging indicator based on historical data, it is best used in combination with other technical and fundamental indicators for a more comprehensive market analysis.