Fear And Greed Index

What do people do when they’re afraid? That’s right: they hide under the bed, they snuggle up with their favorite blankie, and they trade stocks at lower values than what they’re actually worth.

And what do greedy people do? You guessed it: they eat way more than their fair share of the pizza, and they tend to trade stocks at higher values than what they’re actually worth.

Okay, maybe the pizza and blanket and hiding-under-the-bed stuff isn’t necessarily true. (Or maybe it is, we don’t know your life.) But there is a lot of truth behind the stock trading stuff, and that behavior is what led to the creation of something called—quite cleverly, we might add—the Fear and Greed Index, or FGI. The whole point of this index is to measure which emotion—fear or greed—is currently driving the stock market. And they do this by reading our minds.

Actually, no, that’s not how it’s done at all. It’s really a rather scientific process that was developed by CNNMoney, and here’s how it works: each of the following indicators is rated on a scale of 0 to 100. If it gets a score below 50, that indicates fear. And if it gets a score above 50, that indicates greed. The closer to zero that the score is, the more fearful investors are, and vice versa. Here are those indicators:

- Stock price momentum
- Stock price strength
- Stock price breadth
- Put and call options
- Junk bond demand
- Market volatility
- Safe haven demand

Once each indicator is assigned a score, a computer smushes them around and calculates the average, which becomes the official Fear and Greed Index. Over time, the FGI can help investment experts predict stock market trends—and predict which stocks might be over-or-under-valued—by figuring out what makes people confident and greedy, and what totally freaks them out.