What is the Fear & Greed Index?
CNN's Fear & Greed Index measures market sentiment on a 0-100 scale, from extreme fear to extreme greed. It combines seven indicators: VIX volatility, stock price momentum, put/call ratio, junk bond demand, market breadth, safe haven demand, and stock price strength. The index distills complex market dynamics into a single, intuitive number that captures the prevailing emotional state of investors.
Using It as a Contrarian Signal
Buffett's advice to be greedy when others are fearful is quantified by this index. Readings below 20 (extreme fear) historically precede above-average returns over the following year. Readings above 80 (extreme greed) often precede corrections. The index does not predict exact turning points but identifies when the crowd's emotions have reached extremes that tend to reverse.
Limitations
Extreme fear can deepen further, and extreme greed can persist for months. The index is not a precise timing tool. Use it as a temperature check rather than a trading signal. A practical approach: maintain regular investments but add extra capital during extreme fear readings, following a predetermined rule rather than emotional impulse.