Saturday, April 22, 2017

Fear and Greed, The Market Indicator created by CNN

There are all sorts of market timing indicators available, nor one of them will give constant success, The Fear and Greed Indicator is one of many that a trader can use to get a sense of the market.

The representation of the indicator is a meter, similar to a car speedometer.
Here is what it looks like on the web page.


That is the indicator showing results for the close on Friday, April 21, 2017.
As you can see from looking at it, it fluctuates from Extreme Greed to Extreme Fear. Traders can know that when the indicator is showing a great degree of fear, it is time to start to look for long trades, conversely, when the greed is extreme, it is time to lighten up and look for shorts.
That meter approach makes it very easy to get a sense of the markets and is one more tool in the trades tool kit for assessing the markets.
The neutral position at 50 gives the trader something to think about…. as the market is between fear and greed and maybe will make a strong move one way or the other. Sometimes it is best to stand aside.

From Warren Buffet - “Be fearful when others are greedy, be greedy when others are fearful”.“

The composition of the Fear and Greed Index.

CNN has done a lot of work to put this indicator together, a lot of research and testing.
Instead of having to look at several indicators and combine the results a trader needs only to look at this one and see what the combination of 7 indicators gives, saving a lot of time.
The components are as follows:
Market Momentum which compares the S&P 500 to is 125-day average.
Junk Bond Demand which compares the Yield Spread between Junk Bonds and Investment Grade Bonds
Market Volatility which uses the CBOE Volatility Index and the 50-day average.
Stock Price Strength which compares Net New 52 Week Highs and Lows on the NYSE
Stock Price Breadth which uses the McClellan Volume Summation Index considering advancing and declining volumes on the NYSE
Put and Call Options using the CBOE 5 day Average Put/Call Ratio
Safe Haven Demand using the Difference in 20-day stock and bond returns

Once you have looked at the composition of the Fear and Greed Index you can see how much faster it is to research this page instead of compiling all of the data separately.

Here is a chart reflecting the index over a few years (from CNN)


I am not so sure that a trader can base decisions solely on this index, but the index certainly has something to offer in terms of reference as to the mood of investors. 

I am aware that some people have attempted to use the index in trading algorithms, however, there is not a lot of data available for this purpose. 

For my purpose, the Fear and Greed Index is something to have a look at when performing due diligence.

For further information, you can have a look at the CNN 
page here.

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