The Fear Index

The future is bleak.

Apologies to my followers for the recent silence. I’m going through a job transition right now (read: I’m going to be unemployed soon) and job hunting—including customizing resumes, and drafting cover letters, and choosing writing samples, and contacting references, etc.—is consuming way too much of my time.

But enough about me. How are you? How are your stocks doing?

Yeah, I know. It’s hard to nail down this market right now. Too much uncertainty. For whatever it’s worth, it’s not just you. Right now the market is “risk off.” Risk off means that investors are being cautious. “Risk on” means that investors are bullish.

And the CNN Fear Index is way up right now. That’s a bad thing. “The Fear & Greed Index is a way to gauge stock market movements and whether stocks are fairly priced. The theory is based on the logic that excessive fear tends to drive down share prices, and too much greed tends to have the opposite effect.”

Right now investors are very afraid. Let’s take a look at some charts:

The lower the number, the greater the fear. Right now we are at “Extreme Fear.” One week ago the index was at “Fear” 36. One month ago it was at “Neutral” 47. One year ago we were risk on at Extreme Greed 76. From 76, to 47, to 36, to 18. The trend is obvious.

The Fear & Greed Index is a compilation of seven different indicators that measure some aspect of stock market behavior. Let’s take a look at some of these indicators, with the most fearful being first:

Market Momentum [EXTREME FEAR]: When the S&P 500 is above its moving or rolling average of the prior 125 trading days, that’s a sign of positive momentum. But if the index is below this average, it shows investors are getting skittish.

Stock Price Strength [EXTREME FEAR]: This shows the number of stocks on the NYSE at 52-week highs compared to those at 52-week lows. When there are many more highs than lows, that’s a bullish sign and signals Greed.

Put and Call Options [EXTEME FEAR]: Puts are the option to sell while calls are the option to buy. When the ratio of puts to calls is rising, it is usually a sign investors are growing more nervous.

Safe Haven Demand (EXTREME FEAR]: Stocks are riskier than bonds. But the reward for investing in stocks over the long haul is greater. Safe Haven Demand shows the difference between Treasury bond and stock returns over the past 20 trading days. Bonds do better when investors are scared. The Fear & Greed Index uses increasing safe haven demand as a signal for Fear.

Those were all registered as “Extreme Fear.”

The following were registered as “Fear”:

Stock Price Breadth [FEAR]: This measure looks at the amount, or volume, of shares on the NYSE that are rising compared to the number of shares that are falling.

Market Volatility [FEAR]: The most well-known measure of market sentiment is the CBOE Volatility Index, or VIX. The VIX measures expected price fluctuations or volatility in the S&P 500 Index options over the next 30 days. The Fear & Greed Index uses increasing market volatility as a signal for Fear.

Junk Bond Demand [FEAR]: Junk bonds carry a higher risk of default compared to other bonds. A smaller difference (or spread) between yields for junk bonds and safer government bonds is a sign investors are taking on more risk. A wider spread shows more caution. The Fear & Greed Index uses junk bond demand as a signal for Greed.

That’s seven indicators. Four are EXTREME FEAR, and three are FEAR.

Over the past couple of weeks I sold anything that was in the green (except Netflix, which I think will withstand the current anxiety). Today I sold Alibaba (BABA) because I felt like it peaked—but I will buy it again soon. I also sold Schlumberger (SLB) on an uptrend in the midst of a down trend for a minor loss of like $25.

There might be occasional throes of euphoria, but for the most part I think we are headed for a rocky period. If you are swing trading, my recommendation is to cut your losses now. If you are holding for the long haul, that’s fine but just be sure you don’t need your funds to be liquid, because they may go negative for a while.

Mahalo and Bueno Suerte.