Saturday , 26 September 2020


Fear & Greed Index Has Moved Into “Greed” after 2 Weeks in “Neutral”

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The current Fear & Greed index is 66 (“Greed”) up from 52 (“Neutral”) last week. The index jumped to “Greed” after spending the last 2 weeks in “Neutral” and the previous seven weeks in the “Fear” zone.

The article below, as provided by Chris Thompson* of eResearch Corporation, is a summary of CNN Money’s Fear & Greed index (see original source here) for the week ending June 5, 2020.

Although the majority of the indicators are in “Neutral”, Safe Haven and Put & Call Options shifted to “Extreme Greed” with “Stock Price Breadth” remaining in “Greed” but these indicators were enough to move the needle to “Greed”.

CNN Money creates a Fear & Greed index by looking at seven market indicators: 1) Junk Bond Demand, 2) Put and Call Options, 3) Market Momentum, 4) Market Volatility, 5) Safe Haven Demand, 6) Stock Price Breadth, and 7) Stock Price Strength. (See below for more details on each indicator.)

TABLE 1: Ranking of Each Indicator for the Week Ended June 5

INDICATOR RATING
Junk Bond Demand Neutral
Put and Call Options Extreme Greed
Market Momentum Neutral
Market Volatility Neutral
Safe Haven Demand Extreme Greed
Stock Price Breadth Greed
Stock Price Strength Neutral
RESULT: 66
Greed

DIAGRAM 1: Fear & Greed Index Meter

Source: CNN Money

The rationale for the index is that investors are driven by two main emotions: Fear and Greed.

  • When too much Fear rules the market – stock prices might drop below their intrinsic value.
  • When too much Greed rules the market – stock prices might be bid up, above their intrinsic value.

Each market indicator is rated on a scale from 0 to 100, the higher the reading, the greedier investors are being; 50 is neutral. All of the Indicators are summed, equally weighted, for a final index reading.

Key:

Status Reading
Extreme Fear 0-25
Fear 26-44
Neutral 45-55
Greed 56-74
Extreme Greed 75-100

DIAGRAM 2: Fear & Greed Index Three-year Graph

Source: CNN Money

 

CNN Money Fear & Greed index is calculated from seven market indicators:

  1. Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds. The higher the spread, the more risk adverse investors are.
  2. Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options.
  3. Market Momentum: The S&P 500 (SPX) versus its 125-day moving average
  4. Market Volatility: The CBOE Volatility Index (VIX) measures volatility over the next 30 days.
  5. Safe Haven Demand: The difference in 20-day stock and Treasury returns.
  6. Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining using the McClellan Volume Summation Index.
  7. Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange.

You can visit CNN Money’s Fear & Greed index by clicking here:  money.cnn.com/data/fear-and-greed/  The link is “live” and the readings will change during each trading day. The readings are “static” from about 5:00 pm until the next market opening day.

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*About Chris Thompson  148 Articles
Chris Thompson is the President and Director of Equity Research at eResearch. He is a Professional Engineer and CFA Charterholder with a MBA in Investment Management and over 15 years of experience in software development, FinTech, telecommunications, and information technology. For the past 10 years, he has worked in the Capital Markets in Equity Research, M&A Investment Banking and Consulting in various sectors.