The CNN Fear and Greed Sentiment Index is an indicator developed by the business and financial news network CNN Money. This index measures how emotions such as fear and greed are expressed in the stock market and how they influence investor behavior.
The core element behind this index is the idea that excessive fear has the potential to cause stock prices to fall too low, while excessive greed has the potential to cause them to rise too high. In theory, any current price level can serve as a starting point for future movements in either direction.
The index uses seven different indicators to calculate the overall index level. These include: Safe Haven Demand (difference between 20-day stock and bond yields), Put and Call Options (5-day average of put/call ratio), Exchange Supported Extremes, Market Momentum, Stock Price Strength, Volatility (VIX and its 50-day moving average) Junk Bond Demand (yield spread: junk bonds vs. investment grade). These indicators are analyzed using an algorithm that plots the Fear and Greed Index on a scale of 0 (extreme fear) to 100 (extreme greed).
The lower the index level, the more pessimistic or fearful investors are. The higher the index level, the more confident or greedy they are. Stock market traders and investors use the index as a barometer of sentiment to gauge whether the markets are oversold (too much fear) or overbought (too much greed).
Further Information: Fear & Greed Index, copyright (c) CNN
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