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Fear and Greed Index

What is the fear and greed index?

The Fear and Greed Index, created and developed by CNN Business, is a measurement designed to capture the impact of emotions on investors' behavior and willingness to pay for stocks. The Fear and Greed Index is calculated daily, weekly, monthly, and annually. The index is conducted under the premise that an excess of fear leads to a drop in share prices while an outbreak of greed drives share prices upward.


How does fear and greed index work?

The fear and greed index uses seven indicators to calculate a score between 0 and 100, where 0 means extreme fear and 100 means extreme greed. The indicators are:


  1. Market momentum: This metric evaluates the present position of the S&P 500 index in relation to its 125-day moving average. An increased ratio suggests an inclination towards positive momentum and desire, while a diminished ratio signifies a proclivity towards negative momentum and anticipation.


  1. Stock price strength: This factor involves the assessment of the volume of stocks listed on the National Stock Exchange (NSE) that are either marking 52-week highs or lows. A surge in the number of highs signifies resilience and avidity, whereas a surge in the number of lows implies vulnerability and trepidation.


  1. Stock price breadth: This parameter quantifies the volume of shares experiencing upward or downward trends on the NSE. A substantial volume of rising shares points towards broad-based buoyancy and avarice, while a significant volume of falling shares signifies a contractionary trend and trepidation.


  1. Put and call options: This facet entails the computation of the ratio of put options (representing the right to sell) to call options (representing the right to buy) associated with the S&P 500 index. A higher ratio indicates a prevailing sentiment of bearishness and apprehension, whereas a lower ratio implies a prevailing sentiment of bullishness and avidity.


  1. Market volatility: This parameter monitors the CBOE Volatility Index (VIX), a metric that gauges the anticipated price fluctuations of S&P 500 index options over the upcoming 30 days. 


  1. Safe haven demand: This element scrutinizes the comparative returns of stocks and bonds over the preceding 20 trading days. Given the perception of bonds as a safer investment than stocks, a scenario where bonds outperform stocks signifies an escalated preference for secure havens and apprehension, whereas a scenario where stocks outperform bonds implies an increased appetite for risk and avarice.


  1. Junk bond demand: This factor compares high-risk (junk) bonds with high-quality (investment-grade) bonds. Lower junk bond yields suggest a surge in demand for high-yield bonds, while higher yields indicate an execration to high-risk bonds.