The Tool With a Perfect Track Record!

Recently, the market had a pretty substantial pullback a couple of months into Trump's presidency. Most blame this reaction on the consistent back and forth confusion concerning tariffs. Many of these political/economical events that happen are unpredictable and are near impossible to plan for ahead of time, unless you find yourself in Congress. Nevertheless, a tool that has been extremely helpful to semi-predict these market swings has come to my attention. Let's dive in!

The one and only Fear and Greed Index, given to us by CNN. No matter your political views or lack their of, CNN built the fear and greed index off of undeniable numbers that track the overall consensus of the market at any given time. The index, as you could've guessed, ranges from extreme fear to extreme greed within the market on a point scale ranging from zero (extreme fear) to one-hundred (extreme greed). How can they measure how the market is feeling at any given time? Let's see the measurements they use below:

• Stock Price Momentum (S&P 500 vs 125-day average)

• Stock Price Strength (New Highs vs Lows)

• Market Breadth

• Put/Call Ratio

• Junk Bond Demand

• Market Volatillity (VIX)

• Safe Haven Demand (Bonds vs Stocks)

The Point of The Fear and Greed Index

Human nature is evident in the market if you've lived long enough to experience any sort of panic. For example, a pandemic, a housing crisis, or a terrorist attack. All of which I'm sure we are able to imagine specific instances of in the last 25 odd years. Well, none of these detrimental things ended the world, or could even keep stocks down in the long term. If you looked at the fear and greed index in the midst of these times, the consensus would be saying otherwise. Which brings me to my main point.

How Will This Help My Trading?

You may be thinking, "So this tool tells me what I should be feeling in my finances... wow, thanks". But something that almost never fails in the stock market is pattern recognition; and if you can find the almost bottom in the market by measuring how scared the rest of the world is when something hits the fan, you are most likely going to be up if you wait long enough, just off of the rebound alone. Unlike many other investing strategies, this one is almost effortless and has an unbeatable track record. Look at 2008, 2020, and the newest tariff scare. The fear and greed index was in the single digits and rebounded heavy in the following months. Inversely to this, once the fear and greed index reaches 85+ it may be time to consider taking profits as a pullback is imminent. At the very least, do this to buy your stocks back at a discount! The market will never stay in one extreme for too long, but it takes trading discipline to understand this.

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*This article is for informational and educational purposes only. It should not be considered financial, investment, or trading advice, nor a recommendation to buy or sell any securities or financial instruments. Past performance, including examples related to the Fear and Greed Index, is not indicative of future results. Markets are volatile and unpredictable; no indicator is foolproof.