Fear and Greed

It is said that fear and greed impact investment markets. Investors recognize that too much fear can cause stock prices to sink too low and too much greed can push prices too high.  CNNMoney calculates a Fear and Greed Index that tracks how emotions impact the investment markets.  It looks at seven indicators including Safe Haven Demand (the difference in returns for stocks versus US Treasuries), Stock Price Strength (the number of New York Stock Exchange-listed companies hitting 52-week highs and lows) and Market Volatility (as measured by VIX).

The scale of this CNNMoney Index is from 0 (Extreme Fear) to 100 (Extreme Greed) and at the worst of the financial crisis in 2008, the Index fell to 12 (see money.cnn.com/investing/about-the-fear-greed-tool).  In early 2012, stocks made their best run in decades and the Index then indicated extreme investor greed.  On June 1, 2020, the “57” Index score indicated “Greed” as compared to the scores of “43” (“Fear”) one month prior and “24” (“Extreme Fear”) one year prior.

The CBOE Volatility Index (“VIX” or the “Fear Gauge”) was created by the Chicago Board Options Exchange to represent the market’s expectation of forward-looking volatility or risk. The VIX is a forward looking measure that derives an implied level of future volatility based on current prices of calls and puts on the S&P 500.   According to Investopedia, this measure of volatility gauges the magnitude of price movements of a financial instrument over a certain period.  The greater the price swings, the higher the volatility, the lower the price swings, the lesser the volatility – and such swings could be seen to provide a sense of market sentiment.

VIX and the Fear and Greed Index are two of the many metrics studied by “technical” investment analysts to forecast the movement of investments based on charts, patterns, and trends of historical prices of securities.  In contrast to “technical” analysis, “fundamental” investment analysts study the intrinsic value of securities to identify whether an investment is under- or over-priced.  “Fundamental” analysts base their investment decisions on economic, financial, and organization-specific factors, both qualitative and quantitative.  “Fundamental” investors like Warren Buffett evaluate financial statements, industries, management, business strategies and other relevant data in making investment decisions for portfolios with long time horizons.  While each strategy seeks to “buy low and sell high”, a “technical” strategy is generally considered more relevant for short-term investors and traders while “fundamental” investors seek optimal buy-and-hold opportunities for long-term strategies.

Fear and greed are indeed powerful emotions, and it is in our human nature to react to news.  While the first half of 2020 has had its share of bold headlines and market volatility, long-term investors may do well to consider both short-term volatility and a reasonable investment return-projection over time periods that match their own objectives.

 


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