The Fear Is Real in the Fear & Greed Index
How low will it go? And what does it mean for stocks? We take a look at the Fear & Greed Index.
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CNN’s Fear & Greed Index has moved deeply into the Fear zone and will likely touch Extreme Fear by the end of this market downdraft.
In an earlier article, I shared the background of how and why I created The Fear & Greed Index and some ways that I find it helpful.
I recorded this video earlier this week, which included that background and a more up-to-date analysis of the indicator.
Since then, the market has dropped more, and I thought it would be helpful to update the analysis.
Stock Market Indicators:
Market Momentum shows Fear. This is because the S&P 500 is down 6.5% from the July 16th high. I don’t believe that the 125-day average will provide any support, and price support is around 5240 and then 5000. I don’t make predictions, just observations, so I won’t guess where this move will stop.
The two breadth indicators, Stock Price Breadth and Strength, are a bit stronger. Historically, that’s been a good thing, though I’m not sure these days in such a bifurcated market where you’ve had narrow breadth on the way up and those leaders have fallen out of favor quite dramatically. You’ll have to read Helene Meisler’s work for her thoughts on that.
Option market Indicators:
The options indicators show Extreme Fear, and that’s probably good! The Put/Call ratio had shown a high level of bullish speculation. Traders are now looking for ways to hedge their portfolios. As Helene has also mentioned, investors have been too complacent and this change in sentiment is healthy.
Bond Market Indicators:
I take these two indicators with a grain of salt because CNN’s data has gaps. However, today’s values look correct, even though the history doesn’t. Both show extreme fear as investors sell risky assets in a flight to quality. Look at any bond chart and you’ll see that’s the case. Again, like the change in options sentiment, this will be a good thing.
Summary:
So, where are we? The improvement in market breadth is a positive. Everything else shows fear. I’m not going to call a bottom, at least not yet. Over the last year Fear & Greed has bottomed in this range, though it can bounce around here for weeks while stocks go lower. So, for now, be cautious and expect increasing volatility.
