'Extreme Greed' The Dominant Market Emotion For Second Week In A Row

CNN periodically publishes its Fear & Greed Index, which tracks the emotions driving investors. The dichotomy is based on the premise that, while too much fear can push stocks below their fair price, too much greed can lead to the opposite – overvalued stocks.

To determine which emotion is prevailing at the time, the researchers look at seven indicators:

• Stock Price Momentum: how the S&P compares to its its 125-day moving average.
• Stock Price Strength: how many stocks are hitting 52-week highs and lows on the NYSE.
• Stock Price Breadth: the volume of shares trading up, versus those trading down.
• Put and Call Options: the put/call ratio.
• Junk Bond Demand: “the spread between yields on investment grade bonds and junk bonds.”
• Market Volatility: based on the VIX index.
• Safe Haven Demand: the disparity between returns for stocks and returns for Treasuries.

On Monday, CNN issued its latest Fear & Greed Index, which showed the market is still driven by extreme greed – as evidenced by the 77 points rating. However, this week’s rating implied a decline from last week’s 85 points. On the other hand, the market got greedier over the past month. A month ago, the rating reached 71, which implies greed was driving investors.

Also interesting to notice is the fact that, a year ago, the score was 20, which meant extreme fear was the dominant sentiment.