I tweeted last night that I was noticing an increase in number of tweets that were looking for the equity markets to top out in the next few days. While I share this sentiment (although I avoid trying to put a timeline to it), I lose a little confidence in my market perspective when there are so many others that have turned this bearish this fast. I’ll continue to let price action dictate my bias.
I’ve posted a few times about the lofty sentiment figures that have been coming out recently (here and here). Well I’d like to follow those posts up with an indicator published by CNN Money called the Fear & Greed Index. This index takes into account seven sets of market data, which include: S&P momentum, NYSE 52-week highs, breadth, options, junk vs. investment grade bonds, the $VIX and the relative performance of stocks vs. bonds.
The Fear & Greed Index oscillates between 0 and 100 and is currently at 92 which falls under “Extreme Greed.” Five of the sub-indicators are showing ‘extreme greed’ while the option indicator is showing ‘greed’ and volatility is at ‘neutral.’
Looking at the historical chart of the Index we can see that a reading of 92 is one of the highest since 2010. As the chart below shows just because we are experiencing “extreme greed” doesn’t mean the market MUST top out. We were at an elevated level of over 80 at the start of 2012 and we didn’t begin to see weakness in equities for another few months.
Source: Fear & Greed Index (CNN Money)
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