Fear vs Greed Index: What It Is & How It Works

There are a variety of ways that financial analysts try to predict the future movements of the markets. One strategy is to use the market's current emotional state to forecast the next market trend.

Barron Rothschild coined a famous investing quote: "the time to buy is when there's blood in the streets." This phrase states that the market bottom may be when Fear is at its peak, hence the potential for the Fear vs. Greed Index.

How Is the Fear vs Greed Index Measured?

The Fear vs. Greed Index displays a blend of indicators used to gauge the current view of the financial markets.

These indicators are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand.

The result of these indicators is a reading of 0-100 with the following scale:

• 0-25: Extreme Fear
• 25-45: Fear
• 45-55: Neutral
• 55-75: Greed
• 75-100: Extreme Greed

Photo courtesy of CNN

The above snapshot is from August 15th, 2022. In the midst of the bear market, equities have received a sizable bounce for the months of July and August.

You can see that a month ago, the indicator was reading Fear and has since then shifted to Neutral. The rally in equities has been accompanied by an increase in this gauge of Investor Sentiment.

Photo courtesy of Yahoo

The image above is the Fear vs. Greed index from August 2021 through August 2022 overlaid on the S&P 500 for the same timeframe.

How Do Fear and Greed Correlate With Market Trends?

As you can see, both have followed a similar trend over that timeframe, but the correlation is not perfect. For example, investor Sentiment was closer to a peak when the market was about to dip. Conversely, there was more Fear leading up to a market bounce.

Should You Use Investor Sentiment to Make Investment Decisions?

Investor Sentiment is only one qualitative analytical tool and should not be the sole reason for an investment decision. There is no crystal ball when it comes to the stock market, and there is no magical formula. As seen above, science is not perfect, and investor emotions can change quickly.

We believe in the weight of the evidence approach when analyzing our third-party research. This means we compare all the data and opinions before taking any investment actions. For additional information, view our previous blog comparing Fundamental and Technical Analysis.

Key Takeaways

• The Fear vs. Greed Index displays a blend of indicators (market momentum, stock price strength, put/call options, junk bond demand, volatility, safe haven demand) to gauge investor sentiment on a 0-100 scale.
• Extreme Fear (0-25) may indicate market bottoms with buying opportunities; Extreme Greed (75-100) may signal potential pullbacks or selling opportunities.
• Investor sentiment and market movements generally follow similar trends, but correlation is imperfect—fear peaks don't always predict rallies, and greed doesn't always precede drops.
• Investor Sentiment is one qualitative analytical tool, not the sole basis for investment decisions—there is no perfect formula for market prediction.
• Weight of evidence approach works best—compare all data, opinions, and research before making investment actions rather than relying on sentiment alone.
• Barron Rothschild's famous quote "buy when there's blood in the streets" reflects contrarian investing during periods of extreme fear—but timing requires comprehensive analysis.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Best Regards,

Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, and James Wink.