Fear Greed Index
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What is the Fear Greed Index?
The Fear Greed Index is an indicator developed by CNN. Its objective is to measure the degree of «greed» or «fear» at a given moment in time in the market, giving positive or negative readings.
Euphoria and panic are the two main emotional states of the market. Both are mainly responsible for causing volatility in the world’s stock markets. The Fear Greed Index is produced by CNN Money, the economics division of the prestigious American news network CNN.
The Fear Greed Index can vary between 0 and 100. The closer to 100, the more «greedy» the behavior of investors, according to the interpretation of the creators of the index. Conversely, the closer to 0, the more fear in the market. A score of 10 or less is considered «extreme fear».
How is the Fear Greed Index calculated?
The Fear Greed index it’s constructed from the average of seven indicators, which in turn score between 0 and 100 on the same fear-greed scale. These indicators are:
1.- Stock Momentum: Value of the S&P 500 index relative to its 125-day moving average.
2.- Stock price strength: Number of stocks at 52-week highs and lows on the New York Stock Exchange (NYSE).
3.- Stock price strength: Calculated by the volume that is allocated to stocks that are bullish versus those that are bearish.
4.- Put and call options: Compares the trading volume of call options (bullish) with that of put options (bearish).
5.- Junk bonds: A calculation of the spread between the yields of high yield bonds versus those rated as «junk bonds».
6.- Market Volatility: Calculated by taking the VIX as a reference.
7.- Demand for risk-free assets: Spread of Equity yields versus U.S. Treasury Bonds.
How is the Fear Greed Index interpreted?
Some investors believe that a high Fear Greed Index score anticipates a market correction.
While a very low score (fear or extreme fear) anticipates a market rally.
It is not possible to accurately confirm this thesis because there is no historical data on FGI values. CNN only provides a graph of the evolution of the index for a three-year period.