What is the CNN Fear & Greed Index?

The CNN Fear & Greed Index is one of the most famous indicators for evaluating current sentiment in the US stock market. The index ranges from 0 to 100, where 0 represents "Extreme Fear" and 100 represents "Extreme Greed."

How is it calculated?

The index is not derived from questionnaires; instead, it objectively synthesizes market data across the following seven dimensions:

• Market Momentum: The S&P 500 versus its 125-day moving average.
• Stock Price Strength: The number of stocks hitting 52-week highs versus those hitting 52-week lows on the New York Stock Exchange.
• Stock Price Breadth: The volume of shares trading in advancing issues versus those in declining issues.
• Put and Call Options: The put/call ratio, which compares the trading volume of bearish put options to bullish call options.
• Market Volatility: The VIX and its 50-day moving average.
• Safe Haven Demand: The difference in returns for stocks versus treasuries.
• Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds.

How to interpret and apply it?

As Warren Buffett famously said: "Be fearful when others are greedy, and greedy when others are fearful."

• Extreme Fear (0-24): The market may be oversold, which often presents a good buying opportunity for long-term investors.
• Extreme Greed (76-100): The market may be in a bubble or overbought state. Investors should be cautious of potential correction risks.

It is important to note that this index is best used as a broad context reference rather than a precise timing tool for short-term trading. A market experiencing extreme greed can remain greedy for a very long time.