The driving force of every stock and market is
greed and fear. While many will tell you it is earnings or the
economy it is not. Earnings or lack there of, just create the human
emotion of greed or fear. Greed drives people to invest their hard
earned money irrationally and fear causes a mass exodus based on
pure emotion. The best traders and investors in the world use fear
and greed to place themselves on the opposite side of the majority.
Remember, small investors always lose. They invest too late in a
bull market or sell their stocks at the bottom of a collapse, just
before the rally. Therefore, being opposite of the investing public
is the profitable position when the market is at
extremes.
One of the best indicators of fear and greed is the
CNN Fear & Greed Index. This indicator takes into account put
& call options, junk bond demand, market momentum, stock price
strength, stock price breadth, safe haven demand and market
volatility. While not perfect it gives you a good basis for
potential reversals in the market (major tops and bottoms). The key
is to understand how to read it.
Reading the Fear & Greed Index is simple. For
maximum success, only pay attention to readings below 10 (massive
fear) or above 90 (massive greed). History has shown us that when
this indicator gets to these these extremes, the markets are about
to reverse. It is a great tool to have in your tool box and helps
take out the emotion created by the hype on Wall
Street.
Currently, the CNN Fear & Greed Index is at 88.
This tells us the markets are running on greed. However, for a
strong sell signal we still want to see it at least touch 90. It
may today or tomorrow. That would be the dead on short signal I am
waiting for. A reversal/sell off should start within a day or
so.
Gareth Soloway