The Modern Approach to the Fear and Greed Index

The Modern Fear & Greed Index [9 Sentiment Indicators]

The LST Fear & Greed Index: A new take on the outdated CNN fear and greed index. 9 interactive charts that enable you to truly understand market outlook, sentiment and make buy and sell decisions

Welcome to the modern take on the CNN Fear and Greed Index.  Using modern sentiment indicators and important core technical analysis you can easily understand and evaluate the state of fear and greed in the current US stock markets.

What is the Fear and Greed Index?

The fear and greed index has grown to become synonymous with trying to understand the state of mind of investors in the stock market.  When people are feeling greedy it means they are either buying or will buy stocks, this pushes prices up, essentially increasing demand.  When people are feeling fearful it means they are either selling or about to sell stocks, meaning there is an increase in the supply of stocks on the market which in turn decreases stock prices.

Fear = Selling = More Supply of Stocks for Sale = Stock Price Decreases

Greed = Buying = More Demand for Stocks = Stock Price Increases

VIX Fear Gauge

The Chicago Board of Options Exchange (CBOE) Volatility Index (VIX) measures fear by comparing the price volatility of Put Options versus Call Options.  Put Options are purchased when a market participant believes the stock price will go down, this protects there assets, like an insurance.  The Call Option is purchased when a trader believes that the stock price is going up.  Ultimately the index measures the volatility of those prices. A low VIX price indicates the market is good and stock prices will continue on their normal upward trajectory

How does the VIX Fear Gauge Work?

A high VIX price above 20 indicates that more Put contacts are being purchased and that the investors are fearful and covering their trades with downside insurance.
Tip: Use the mouse scroll wheel to change time-frames to see the VIX fear gauge in 2008

CBOE Volatility Index – >30 = Fear – < 20 = Greed

VIX chart by TradingView

NYSE Advance Decline Ratio

The New York Stock Exchange Advance Decline Ratio is the number of stocks with a price increase for the day divided by the number of stocks with a price decline for the day.  Price is ultimately the decider of fear and greed and rising stock prices mean people are feeling bullish.

How does the NYSE A/D Ratio work?

A ratio of 1 means that there was one advancing stock for every 1 declining stock.  Above 2 means that that the market is in greed mode with 2 stocks rising to every 1 falling.
Tip: Use the mouse scroll wheel to change interact with the chart time-frames

NYSE A/D Ratio < 1 Fear – > 2 Greed

ADRN chart by TradingView

S&P 500 Weekly Chart Above Moving Average 9

Here we take the S&P500 weekly chart and plot a 9-period moving average over it.  The price line is the thicker blue line, the moving average is the thinner line.  When the price is above the moving average indicator this is bullish, meaning the main price trend is up, therefore investors are greedy.

How does the S&P500 Chart Work?

When the price line is below the moving average this indicates fear.  As we are using a weekly line chart we are estimating the long-term trend of the market, this helps you make better long-term investing decisions.
Tip: Use the mouse scroll wheel to change interact with the chart time-frames

S&P 500 Weekly – Fear = Price < Moving Average – Greed = Price > Moving Average

SPY chart by TradingView

Federal Reserve Bank Kansas City Financial Stress Index

Financial stress is defined as interruptions to the normal functioning of the financial markets.  This important leading indicator is published monthly and give valuable insight into investor stress in the financial markets. Measures include TED spread, Swap spread, Stock Bond Correlation, Bank Stock Volatility and more

How does the Financial Stress Index Work?

When the value line is above zero or positive, this indicates that financial stress is above the historic average (fear).  A value below zero indicates normal functioning of the markets (greed). A value above 0.8 typically indicates severe stress and fear in the markets, this occurred back in 1999 and 2007. In September 2008 the index spiked to a value of 6.
Tip: Use the mouse scroll wheel to change interact with the chart time-frames scroll back to 1999 and 2007 to see the stress line rise.

Kansas City Financial Stress Index – Extreme Fear = Price < 1 – Greed = Price < 1

STRESS_INDEX chart by TradingView

AAII Sentiment Indicator

The American Association of Independent Investors (AAII) Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. On the chart the central horizontal line represents the average bullish sentiment over the period, 0.35 means 35% of investors possed were optimistic that the stock market would rise over the next six months.  At the extremes, the AAII sentiment indicator registered 0.2 or 20% of investors were bullish at the worst point in the financial crisis in December 2007.  The highest level of bullish sentiment was on December 20, 1999, when 75% of investors were bullish; this was during the Dotcom bubble hype a few months before the crash.

How does AAII Sentiment work?

This indicator is best used as a contrary indicator when sentiment is extremely high it is an indication to sell, and when extremely low and an indication to buy stocks. As Warren Buffet says “be fearful when others are greedy and greedy when others are fearful”.

Historical Average 0.36 – Fear < 0.25 – Greed > 0.50

AAII/AAII_SENTIMENT chart by TradingView

TradingView Technical Analysis Buy Sell Gauge

In addition to the fear and greed indicators we have above, TradingView has very cleverly implemented a Buy-Sell Gauge based on technical analysis.  Technical Analysis is based on the principle of evaluating the market direction using stock price and volume to determine underlying supply and demand.  This is a much better indicator than for example the AAII Sentiment indicator because, as we know most investors are wrong at key points in major market turns.  The buy-sell indicators are based on 26 different well established technical indicators:
Moving Averages
  • 6 Simple Moving Averages with timeframes 10, 20, 30, 50, 100, 200
  • 6 Exponential Moving Averages 10, 20, 30, 50, 100, 200
  • Ichimoku Cloud (9, 26, 52, 26)
  • Volume Weighted Moving Average (20)
  • Hull Moving Average (9)

How do the Buy Sell Technical Indicators Work?

When any of the above technical indicators is clearly a buy or a sell it counts as 1 point.  When it is unclear is counts as neutral.  Now take a look at the Buy Sell Indicators below to see the average rating and the buy-sell and neutral ratings.
Oscillator Indicators
  • Relative Strength Index (14)
  • Stochastics %K (14, 3, 3)
  • Commodity Channel Index CCI (20)
  • Average Directional Index (14)
  • Awesome Oscillator
  • Momentum (10)
  • Moving Average Convergence Divergence MACD (12, 27)
  • Stochastic RSI Fast (3, 3, 14, 14)
  • Williams Percent Range (14)
  • Bull Bear Power
  • Ultimate Oscillator (7, 14, 28)

S&P 500 Index Technical Sentiment

Technical Analysis for SPX by TradingView

NASDAQ 100 Index Technical Sentiment

Technical Analysis for NDX by TradingView

Dow Jones 30 Index Sentiment

Technical Analysis for DJI by TradingView

Dow Jones 20 Transport Index Sentiment

Technical Analysis for DJT by TradingView

Extreme Greed & Fear Creates Boom & Busts

We have all heard the phrase “Boom and Bust”, but what is it? What causes it? More importantly what effect can it have on our investments?

What is Boom and Bust?

“Boom and Bust” describes the sequence where an economy, commodity or market sector goes from surging forward, making lots of profit and growing at breakneck rates and is generally along the way improving the wealth and standard of living of all participants in the market.  A boom is usually accompanied by a significant amount of greed or irrationality about the underlying fundamentals of the Boom.“Bust” refers to the contraction of the previous boom, usually fueled by a significant economic or fundamental change in the criteria that fueled the boom in the first place.  This tends to result in various side effects ranging from a reduction in profits, earnings, growth, increased unemployment, restriction of credit, and of course, a strong change of psychology of the market participants from optimism and greed to pessimism and fear.
A 100 Year History Of Fear & Greed, Boom & Bust in the Stock Market. Chart: Dow Jones Industrial Average (Ticker:DJIA) 1918 to 2018
A 100 Year History Of Fear & Greed, Boom & Bust in the Stock Market. Chart: Dow Jones Industrial Average (Ticker:DJIA) 1918 to 2018

Why do “Booms and Busts” occur?

Take for example the famous Dotcom boom of 2000.  Greed surged into the marketplace on the misplaced belief that new Internet-based technology would fundamentally shift the market dynamics and business models of the future.  Technology became fashionable and “Bricks and Mortar” businesses were perceived to be outdated and almost worthless.  This paradigm shift meant that money poured into technology stocks at an unrepentant rate and that money poured out of “Bricks and Mortar” stocks at an equal rate.

Signs of A Bust

A telltale sign of problems to come was really noticeable when stock analysts would suggest Price Earnings valuations on tech. stocks of 200, 300 or more were reasonable even though the companies in question had never made a profit.  The Price Earnings Ratio is the ratio of the Stock Price to its actual earnings.  If a P/E Ratio is at 30 then it would take the company 30 years to earn back the share price.  The higher the P/E ratio, the higher the expectation that the stock will perform well in the future.  You can also see the Price Earnings (PE Ratio) as a valuation of the worth of the stock, if the P/E is 200 you are essentially paying 200 times the earnings capacity of the company.

The Year 2000 Dotcom Bust

In the year 2000, the PE Ratio of the S&P500 reached nearly 45.  This was an all-time high and essentially indicated that the expectation of the market participants was completely unrealistic.  By the time the inevitable correction completed, the P/E Ratio for the S&P500 had halved to just over 20.  Much of the greed and hype was fueled by professional analysts and so-called “market gurus.”  They became greedy and euphoric: a heady mixture.   When everyone slowly began to realize that the huge profit expectations would not be met by the tech. industry, the entire sector collapsed, bringing with it other industries, indices, and markets.  The technology bubble had burst.
[Related Article: The Stock Market Today – Rational Jargon Free Stock Market Analysis]
If you found value in this modern analysis of the fear and greed index or want to help us improve, leave a message below or share with your friends.

20 COMMENTS

  1. Bary,

    This is terrific, and hopefully you’ve patented the” Modern Fear and Greed index”
    It should be immediately expanded and published /updated Daily/Weekly.
    More feedback ahead

    Thank you, for this compelling sentiment illumination.

    THE_UNWIND
    New York

  3. Hi Barry, excellent extract from the plethora of indicators floating around. I am not able to (can not) follow the stocks to be able to trade and respond in time. I therefor pay more attention to fundamentals of the company. Do you look into that aspect as well? cheers BK

    • Hi BK, thanks for the comment, yes I sure do watch the fundamentals. It is always a time and effort versus return. There is no solid evidence to suggest that day trading makes more people wealthy than long-term investing. In fact, it is longer-term investing that wins that battle, so understanding the fundamentals is very important. The fear & greed index is to help people understand the state of the market overall, and help you make the big decisions 🙂

  4. This is a really great set of charts, its now very clear, I will be using this in the future. Will checking it weekly be often enough?

  5. Hallo Barry
    Wie finde ich die beste DJIA index kurzfristige , mittelfristige käufe und verkäufe( boden und gipfel)Im 100 jährige chart sieht es ungenau
    Grüsse Eddy

  7. Hello Barry how do you understand this indicator. Does 26 points sell strong and buy 26 points strong sell? I ask for an answer
    thanks Eddy

  8. I see the 9 indicators. Where is the Fear-Greed index? I was looking for a single number that combines all the 9 indicators similar to what the CNN Fear Greed Index provides.

    • I’m not sure this qualifies as an “Index” if it limited to a list of 9 indicators. The CNN also using distinct indicators which are then combined into an “index”. No one should make decisions based on a single index or calculation, of course. But an “index” does sum up all the “indicators”.

  9. This is a top way to assess the market direction, thanks for putting it together. I really like the AAII sentiment and the technical indicators,

  10. Hello,
    And thank you for sharing your model with the public. I was wondering if you have any historical evidence that showed the model picked the buy and sell times correctly?

    Sincerely,

    Saeid

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