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Using The CNN Fear & Greed Index In Stock Trading Strategies
The CNN Fear and Greed Index is a critical tool for traders, encapsulating market emotions that drive stock prices. This Index, ranging from 0 (maximum fear) to 100 (maximum greed), is calculated using seven key components:
- Market Momentum
- Stock price strength
- Stock price breadth
- Put and call options
- Market volatility
- Safe haven demand
- Junk bond demand
Each factor contributes equally to the final score, providing a holistic view of the market's emotional state.
For traders, this publicly available Index is invaluable. It offers insights as an alternative data source beyond traditional financial metrics, highlighting whether rational strategies or emotional reactions drive current market trends.
Extreme readings on the Index often signal potential market turning points: a high score might indicate an overvalued market poised for a correction. In contrast, a low score could suggest undervalued stocks and buying opportunities.
This article will compare the relationship between this Index and some popularly traded stocks. We will also fit a simple trading strategy to see how it performs over the traditional SPY buy-and-hold strategy.
As seen in the image above, the snapshot provides just a single day of data, but if we select the timeline, we can obtain historical data to uncover trends, etc. The Index currently populates the last year or 365 data points.
The first step would be obtaining this data. We will use a Python script to automate this data collection process.
