Why You Should Be Looking At The Fear And Greed Index

Out of most things in the world, money is probably one of the biggest attractions. That’s pretty natural since, without money, we stand nowhere. In order to lead a well-settled and respectable life, one ought to have enough money in their accounts. We put effort into earning it, which is why sometimes it takes a toll on our emotions.

In the case of stock market enthusiasts, money is what they believe in. If one earns more money while trading, the influence becomes positive and they wish to earn even more. On the other hand, if there’s a loss, the urge to earn money decreases. This is where the fear and greed index comes in.

A lot of factors go into looking and understanding the index. The investor’s sentiment, proper investment management, and so much more.

Disclaimer

We are a group of IT professionals that are passionate about their product and the way it can be applied to different industries, like finance. The definitions and analysis presented in this article are for information purposes only. This is not intended as investment advice. If you wish proper investment advice, seek a duly licensed professional.

Now, what is

This index, developed by CNN Money, aims to measure two of the primary sentiments that govern an investor’s wish to invest in the stock market. The index is measured on a daily, weekly, or monthly basis. The main point is that too much fear drives down the urge to invest and too much greed drives it up.

The fear and greed index keeps updating every 24 hours or so. 0 measures the highest level of fear, which means absolutely no desire to buy stock. 100 refers to the maximum greed or the strongest desire to buy stock.

In this case, the investor just can’t stop buying that stock and the urge to invest here becomes excessive. Ideally, one should always stay in the middle to ensure there’s a balance between fear and greed. The index applies to the stock market as well as for cryptocurrencies.

Why is investor sentiment important?

While thinking of investing in a certain stock, there are different kinds of data one must consider. Investor sentiment is one of these types which is useful for making proper decisions. Market sentiment or investor sentiment refers to the overall consensus or agreement of a group of stock traders regarding the market or stocks.

Investor sentiment is driven by crowd psychology which affects the activity or prices of the different stocks. For example, the market sentiment is bullish when the stock prices rise and bearish when they fall.

There are lots of indicators that can help to identify the market sentiment. Day traders often utilize these tools to understand the market sentiment better and earn profits on short-term price movements. The fear and greed index also indicates this sentiment.

For example, greed can sometimes be a good selling point that drives people to keep buying stocks if the market goes the other way down later. Cryptocurrency depends heavily on people’s opinions, as well as social media. So even here, investor sentiment is a key factor.

The Fear and Greed index

As mentioned earlier, too much fear can make stocks sell at prices much lower than their actual selling points while excessive greed can drive up prices pretty high. Many skeptics tend to dismiss this entire index because it focuses more on the timing than a buy-and-hold strategy.

According to CNN, the fear and greed index is measured on seven parameters, namely:

1. Stock price momentum - This is a measure of the Standard and Poor’s 500 Index and its relation with the 125-day moving average.
2. Strength of the stock price – This is the number of stocks that hit the 52-week highs vs the 52-week lows on the New York Stock Exchange.
3. The breadth of the stock price - Analysis of the trading volumes of the rising stocks against the ones that are declining
4. Put and call options - This refers to the extent up to which the put options are lagging behind the call options. This indicates greed. If the call options are lagging behind, it signifies fear.
5. Demand for junk bonds – The interest towards the higher risk strategies by measuring the spread between yields on the investment-grade or junk bonds.
6. Market volatility - CNN takes into account the Chicago Bond Options Exchange Volatility Index (VIX) or the stock fear index
7. Safe Haven demands - Difference in the returns vs treasuries for stocks

Each of these parameters is measured from 0 to 100. The index is calculated by taking the average of each of these indicators. If the index comes to 50, the reading is called neutral. If it's more than 50, it means the greed has risen.

Crypto Fear and Greed index

Just like the stock market fear and greed index, there is a similar crypto fear and greed index that is published by Alternative.me. This index is also based on the trader’s emotions and is quite the same as the stock market index.

Here also, the term “fear” refers to a phenomenon where the crypto investors are worried. But it’s also a potential for buying more. If the index shows “greed”, it means that the investors have to rectify themselves. The score is between 0 to 100, with 0 standing for extreme fear and 100 for extreme greed.

The lower score appears in red, which indicates that investors are selling their assets, which is causing a decline in the market. A higher score is shown in green which means the market is due for a correction.

Extreme fear is usually between 0 to 49. 50 is considered neutral, 51-74 is greed, and 75-100 stands for extreme greed. The crypto index is also based on several calculation factors like volatility, volume, posts on social media, and coin dominance.

The index is published by Alternative.me regularly. However, it’s important to note that the index is only an indicator of the current market sentiment. It doesn’t always accurately predict the future of market movements. This applies to all forms of currencies like cryptocurrency, bitcoins, NFTs, etc.

How to keep track of the index?

You can check the index as per your requirement, that is, daily, weekly, or monthly. Since the index shows historical values, you have a good start there. But manually looking at the index all the time can get tiresome. This is where Stillio can come in handy. Using Stillio, you can automate the screenshots as per your convenience to track the index.

Your screenshots will be stored safely in your Google Drive or Dropbox. Stillio’s automatic screenshot feature is very useful here since you can capture the full-length screenshots at a frequency of your choice. So, if you wish to cut down on manual labor and save all necessary index screenshots, Stillio is your best option.

Conclusion

After learning about the fear and greed index, you’ll probably realize that it has a lot of pros as well as cons. Looking at the pros, you can see that this index is a pretty reliable indicator of investor sentiments and market trends. Anyone can make a proper investment decision based on the index and you can even find the overvalued undervalued stocks easily.

This way, you become a pro at trading. But coming to the cons, this tool is just an indicator for the market timing; you shouldn’t depend heavily on it. Secondly, it adds to the volatility of the market since investors keep entering and exiting on the basis of the readings.

Ultimately, the choice to invest wisely lies with you. Using Stillio, you can refer to the index readings anytime and make proper decisions. Remember to research thoroughly before jumping right in and refer to the term DYOR.