What Is the Fear vs Greed Index?

The fear vs greed index is a tool that investors can use to measure the market’s overall attitude towards risk. It is calculated by adding the percentage of investors who are fearful (based on their answers to a survey) to the percentage of investors who are greedy (based on their answers to a survey). This number is then divided by two. The fear index is thought to be a good measure of market sentiment because it shows how individual investors feel, as opposed to institutional investors who may take a longer-term view.

Why Does It Matter?

Investors can use the index to assess market conditions and make investment decisions accordingly. For example, they may wish to avoid aggressive purchases if the fear vs greed index is high or they may be more willing to take risks with their investments if it’s low. An investor looking for a time when there is less risk in the market might look at a low fear vs greed index.

How to Use the Index

The fear vs greed index can be found on most financial news websites. It is usually presented as a graph or chart, with the fear index on the left and the greed index on the right. The index can also be used to develop a contrarian investment strategy. For example, it might be wise to sell an asset class when the index is high and buy it when the fear vs greed index is low.

How This Can Be Applied in Your Life

The fear vs greed index can help you make better decisions about other investing choices you have outside your 401(k). For example, if you have money in stocks, you may want to sell them if the fear vs greed index is high, and buy them back when it’s low. You can also use this information to help with your day trading decisions. Keep in mind that the fear vs greed index should not be used as the only measure to determine the market’s sentiment, but rather as one factor in your complete investment strategy.

How Is the Fear and Greed Index Calculated?

The Fear and Greed Index is made up of seven variables that are combined to provide a final score.

Stock Price Momentum

An indicator that compares the Standard & Poor’s 500 Index (S&P 500) to its 125-day moving average.

Stock Price Breadth

Analyzing the trading volumes in gaining equities against declining equities.

Stock Price Strength

The number of companies achieving 52-week highs versus those that drop below the NYSE’s 52-week mark (NYSE).

Put and Call Option

The degree to which put options fall behind call options, signifying greed, or rise above them, indicating fear.

Market Volatility

The Chicago Board Options Exchange Volatility Index (VIX) is tracked by CNN, which is focused on a 50-day MA.

Junk Bond Demand

The spread between investment-grade bonds and junk bonds is a key indicator of appetite for riskier options, as it reflects the difference in yield.

Safe-Haven Demand

The difference in returns between equities and bonds.

Benefits of Using the Fear and Greed Index 

The Fear and Greed Index can be helpful to investors because it offers a composite score of market sentiment. This can be useful when making investment decisions because it allows you to see the big picture and not just focus on one variable. The Fear and Greed Index also has the benefit of being updated frequently, so you can track how the market is feeling on a day-to-day basis. It is important to note that the Fear and Greed Index should not be used as the only measure of market sentiment, but rather as one factor in your complete investment strategy.

Drawbacks of Using the Fear and Greed Index 

The main drawback is that it does not provide any additional information that would justify an investment decision. For example, you can look at the index and determine that it is high or low, but it does not tell you whether the market will go up or down (or vice versa). It also does not explain why the index is where it is. The calculation uses some complex formulas that can be difficult to understand for the average investor.

The Bottom Line

The Fear and Greed Index is a tool that investors can use to determine market sentiment. It is made up of seven variables that are combined to provide a final score. The index can be helpful to investors because it shows the overall market sentiment and can be used to develop a contrarian investment strategy. It does not provide any additional information that would justify an investment decision, but it is a very simple tool that can be used alongside other investing tools. The Fear and Greed Index can also help you make better decisions about other investing choices you have outside your 401(k). It is usually presented on most financial news websites and is made up of seven variables. Keep in mind that the Fear and Greed Index should not be used as the only measure to determine the market’s sentiment, but rather as one factor in your complete investment strategy.

The Fear and Greed Index is a tool that investors can use to determine market sentiment. It is made up of seven variables that are combined to provide a final score.
The Fear and Greed Index can be helpful to investors because it offers a composite score of market sentiment. This can be useful when making investment decisions because it allows you to see the big picture and not just focus on one variable. The Fear and Greed Index also has the benefit of being updated frequently, so you can track how the market is feeling on a day-to-day basis.
The main drawback is that it does not provide any additional information that would justify an investment decision. For example, you can look at the index and determine that it is high or low, but it does not tell you whether the market will go up or down (or vice versa). It also does not explain why the index is where it is.
The Fear and Greed Index is updated frequently, usually on a day-to-day basis.
The calculation of the Fear and Greed Index is done by a few different people. However, the most well-known person to calculate it is Jonathan Hoenig of Capitalist Pig Asset Management.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.