The Fear and Greed Index

With stocks blasting to new session highs and leaving last weeks sellers behind in a pile of ashes and dust, I took a look over at the CNN Money Fear and Greed Index.

It's still at an 8.    It says there is extreme fear in the market.  I have a fear of heights.  It's not a small fear, a large fear, or an extreme fear, I just don't want to be higher than 20 feet in the air.   Many people have a fear of spiders - fear is fear.  A small spider, a big spider, a deadly spider, a daddy long legs, they don't care, they just fear spiders.  You either fear something or you don't. However when trading stocks it seems fear comes in all different shapes and sizes.

The Index says that the market is extremely fearful these days.   Are traders looking under their desks before booting up their terminals?   Are their bosses dressed like the Grim Reaper?   Does Janet Yellen have her bedroom swept for Monsters before she goes to bed at night?

Last week the fear index  stuck at 0, giving it highest possible reading for Fear.  A few weeks ago it was Greedy.  Even the Fuel Gauge on my car doesn't move around that much.

The Fear and Greed Index is described as "What Emotion is Driving the Market Now?"  To me this is what makes the Index confusing.  I think Fear and Greed can be both positive and negative for stocks.  The Fear of missing out on a rally.  I think that is what is driving prices higher right now.  While the 8 reading today signals a negative fear, the market is trading with a different type of fear.  The fear of missing out on a big move higher.  There is greed on the downside as well.  Greed isn't necessarily just for the bulls.  How about all those shorts from last week that were greedily doubling down on their positions at the height of the sell-off?

There was fear throughout the rally from the market lows in March of 2009.  Each step to higher prices was fraught with fear.  There is always fear in this market.  Fear of having your profits erode.  Fear of missing out on the short of a lifetime.  A lot of the fear in this market happens as stocks rally.  A lot of the Greed in this market happens when stocks fall and there is a lot of Fear when stocks hit record high prices.

I like what the Fear and Greed Index stands for.  It gives you an idea of how emotions affect the market, but I think its impossible to put a number on it.  There is always fear and greed in the stock market whether we are in a bull or bear market.

Last week the action wasn't extreme fear, it was of 'sell at all costs'.  This week, and most notably today, the action is 'buy at all costs' .  As much as you want to put a number on the stock market it really is a market that is either hot or cold.  Buy or sell.  Stay or go home. Instead of a Fuel Gauge type index a simple light switch would work better and probably help you be a more profitable trader.

Right now that switch is on BUY.

Tomorrow it might change to SELL.

It's not a dimmer switch.  It won't go halfway, and it won't go both ways.  Buy or sell.  That is what this market is all about.  It's greedy AND fearful, but it's never going sharply higher and sharply lower at the same time.  Whether stocks are moving up or down there is ALWAYS Greed AND Fear.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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