The Fear and Greed Index (FGI) is CNN Money’s brainchild. The FGI, which is available online, measures the emotions that drive investors’ decisions within a specific period, namely daily, monthly, or annually. It is worth noting that greed and fear have distinct effects on the market.
The definition of greed in the financial markets’ context is given as the extreme desire for wealth. Fear, on the other hand, is defined as the unpleasant feeling that emanates from the belief that trading in a particular stock will lead to losses of finances and anguish. Essentially, it is the thought that the investors’ safe position is threatened or in danger.
Greed leads to an increase in the prices of stock whereas fear causes a drop to extremely low stock prices. CNN Money arrives at the FGI by analysing seven indicators. It then uses the index to determine whether the stock market is priced fairly.
Fear And Greed Indicators
FGI is very useful for every trader because it shows the market tendencies. For many years it was one of the most reliable indicators in graphic changes. Thus, professional traders defined the main indicators of this index.
CNN relies on the CBOE (Chicago Board Options Exchange) market volatility index (VIX) which is expressed as a percentage. The VIX is also known as the fear index. It shows the expectations of the market with regard to the 30-day anticipated volatility. CNN then gauges it against the 50-day moving average (MA).
Put and Call Options
Pull options enable investors to sell stock on or before a stipulated date at a price agreed upon by the parties. Call options, on the other hand, relate to the purchase of stock on or before a stipulated date at a price agreed upon by the parties. When the put to call ratio is more than one, this shows fear (fear index). Conversely, when it is less than one, this is indicative of greed (greed index).
Safe Haven Demand
Treasury securities are safer than stocks. This indicator refers to the difference between the returns an investor gets from stocks and what they earn from treasuries. It is indicative of whether investors will shift from focusing on treasury securities to starting stock trading.
Stock Price Breadth
CNN Money utilizes the McClellan Volume Summation Index. The indicator is the extent to which share volume has grown or declined by analysing those on the rise against those that have dropped.
More FGI Indicators
- Stock Price Strength: This is the total number of stocks that hit their one-year highs versus those that have reached their one-year lows.
- Market Momentum: This indicator contrasts the S&P 500 index against its 125-day average.
- Junk Bond Demand: It is a measure of whether investors are chasing high-risk strategies. CNN Money arrives at this indicator by establishing the yield spread between junk bonds and investment-grade bonds.
How Fear And Greed Affects The Market
The fear and greed index (FGI) is arrived at by focusing on seven indicators. Importantly, greed brings about a rise in the stock prices while fear leads to a decline to extremely low stock prices. CNN Money, which developed the FGI, uses it as a determinant of fair stock pricing.
FGI helps to define speculations on financial markets, so a trader can make decisions on whether to put orders or not to do this.
There are 7 FGI indicators. They are market volatility, put and call options, safe-haven demand, stock price breadth, stock price strength, market momentum and junk bond demand.