The Fear and Greed Index

May 28, 2012 James Heinsman Economic Barometer

There are two main emotions that motivate investors into opposing corners, and those are fear versus greed. When there is an overabundance of fear investors stay away and stock prices plummet; but when investors’ greed overtakes their fear stock prices can reach unreasonable heights.


There are seven indicators that influence the Fear /Greed Index, including:

•    Stock Price Momentum: That is the S&P 500 versus its 125-day moving average.
•    Stock Price Strength: The number of stocks hitting 52-week highs/lows on the NYSE.
•    Stock Price Breadth: The volume of shares trading in stocks going up versus those going down.
•    Put and Call Options: The put to call ratio which compares the number of bullish call options compared to the trading volume of bearish put options.
•    Junk Bond Demand: This is the difference between the yields of investment grade bonds versus yields from junk bonds.
•    Market Volatility: The VIX measures volatility.
•    Safe Haven Demand: The difference in returns for stocks versus treasuries.
 

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