Putting a Number on Mr. Market's Mood Swings For many years, it was impossible to quantify Mr. Market's mood swings. But today, there are many ways. One of my favorite websites, SentimenTrader, generates a handful of customized sentiment indicators every day. But if you are looking for a "quick and dirty" solution, I recommend CNN's Fear & Greed Index. A composite of seven underlying indicators, the Fear & Greed Index provides a quick overview of market sentiment, giving you reliable insight into Mr. Market's current mood. You read the Fear & Greed Index much as you would a speedometer. If the indicator rises above 75, it signals "extreme greed." If it falls below 25, it signals "extreme fear." I have been tracking the indicator for about a decade. Over that time, it has fallen below 20 an average of about twice per calendar year. I have seen it drop to zero on half a dozen occasions, most recently at the bottom of the coronavirus crash in March 2020. But here's the most critical thing... In every instance that I can recall, "extreme fear" turned out to be a terrific time to buy stocks. So where does the Fear & Greed Index stand today? Four of the seven indicators are in bearish territory, and the overall index standing is 17. The U.S. stock market is showing signs of extreme fear. Because market sentiment is a contrarian indicator, today's negative market sentiment makes now a perfect time to invest. How I Use Market Sentiment in My Investing Let me share my personal rule of thumb... I have a set of core holdings - I call them my "never sell" portfolio. I will increase my investments in these stocks when the Fear & Greed Index drops below 20. Right now, the Fear & Greed Index tells me that we are experiencing just such an opportunity. The lesson? Investing in the stock market during times of extreme fear is challenging. It often feels just plain wrong. Still, here's what hard-won experience has taught me: By betting against Mr. Market's mood swings, I'm doing the right (and profitable) thing. The Fear & Greed Index can help you do just that. Good investing, Nicholas |
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