Today I observe the Fear and Greed Index below is at an “Extreme Greed” level.
Investors tend to get optimistic (and greedy) after prices have gone up and then fearful after prices go down. I am not necessarily a contrarian investor. I mainly want to be positioned in the direction of global markets and stay there until they change. But markets sometimes get to an extreme – increasing the probability of a reversal. My purpose of pointing out these extremes in investor sentiment (fear and greed) is to illustrate how investors’ feelings oscillate between the fear of missing out (if global markets have gone up and they aren’t in them) and the fear of losing money (if they are in global markets and they are falling). Fear and greed is a significant driver of price trends. When stock market investor sentiment readings get to an extreme it often reverses trend afterward.
For example, the last time I pointed out an extreme measure was August 27, 2013 in “Investor Sentiment Reaches Extreme Fear” when the Fear/Greed dial suggested “Extreme Fear” was the return driver. I said when we see these extremes in fear it happens after prices have fallen. Prices can keep falling after it gets to such an extreme, but we often see the directional price trend reverse back up after an extreme fear measure. What I think is useful about observing extremes in sentiment are to understand how investors behave at certain points in a market cycle. If you find you have problems with this behavior, you may use it to modify your behavior.
Below is a chart of the S&P 500 stock index and I have marked August 27th which was the date I observed the “Extreme Fear” reading. As you can see, indeed that was a short-term low and prices climbed a wall of worry since then.
Today, the investor sentiment is “Extreme Greed” as the driver of prices, so we’ll see in the coming months how that plays out.