Investing & Money, Technology
piece written on the 15th April 2014 by  

Yesterday I was going on about the new JSE website and how they could have done something really innovative within the financial industry, fortunately tonight I can talk about something in the financial industry that is innovative. Introducing the Fear and Greed Index.

When it comes to investing, if you’ve met a financial planner you’ll have heard them talking about the different types of investors. Each financial advisor has different terminology, but at the end of the day it boils down to emotions around fear and greed.

The describes it well:

CNNMoney have come up with their own index ranging from 0-100 that tries to quantify the level of fear (0) and greed (100) in the market. Fear is usually synonymous with selling, extreme fear usually leaves a stock sold way past it’s value point, while greed is synonymous with buying, extreme greed leaves a stock over-priced. But the Index is not this simple.

There are 7 different indicators that they take into account for this index:

  1. Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average
  2. Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange
  3. Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.
  4. Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options
  5. Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds
  6. Market Volatility: The VIX (VIX), which measures volatility
  7. Safe Haven Demand: The difference in returns for stocks versus Treasuries

Here is an example:

Screen Shot 2014-04-15 at 10.55.04 PM

This is a really useful overall measuring stick that’s worth keeping your eyes on.