We analyze a lot of data here at Allstarcharts.
Stocks in the U.S. and around the world, Interest Rates both domestic and global, Commodities, Currencies and an infinite amount of Intermarket Relationships that help us identify trends across assets.
Price is what pays. Not just around here, but also for you reading this, as well as every other investor on the planet.
Nothing else is going to pay you.
So when it comes to “What is the best Technical Indicator?”
The answer is Price.
Now, in order to supplement our price analysis, we include things like Momentum and Breadth studies, Relative Strength, Sentiment, Seasonality, Volatility and a bunch of new tools and strategies that we continue to develop as markets evolve over time.
Sentiment can be a tricky one.
I think anyone who has been in markets for a while would agree.
The short answer is that there is NO single sentiment indicator that will tell you when to buy or sell stocks, or any other asset class for that matter.
Where Sentiment really stands out to me is when it is at a historic extreme, which by definition, is not very often.
Pretty much all the time, sentiment is somewhere in the middle, and not near extreme fear or near extreme greed.
We use things like the COT Report, Investor Intelligence, NAAIM, Consensus Inc, AAII, Social Media and other data we’ve gotten our hands on over the years.
There is no one indicator that tells us everything. The idea is to aggregate it all and turn it into a composite. The best in the business do this well. The worst in the business cherry pick whichever one fits their narrative.
Which brings me to today’s topic: CNN Fear & Greed Index.
I get it sent to me all the time, almost as if I didn’t have a computer where I could go check it myself.
The thing is, the CNN Fear Greed Index is NOT a sentiment indicator. And if you think it is, it probably confuses you quite often.
The reason is because when you look at its construction, most of the data has nothing to do with sentiment. They include a bunch of momentum and breadth statistics.
According to their site, they look at 7 Indicators:
Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average
Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange
Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining.
Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume of bearish put options
Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds
Market Volatility: The VIX (VIX), which measures volatility
Safe Haven Demand: The difference in returns for stocks versus Treasuries
And here’s the process from CNN:
For each indicator, we look at how far they’ve veered from their average relative to how far they normally veer. We look at each on a scale from 0 – 100. The higher the reading, the greedier investors are being, and 50 is neutral.
Then we put all the indicators together – equally weighted – for a final index reading”
So here’s the thing. If this was a “Sentiment” Indicator, then why would you look at Price Momentum, Price Strength and Price Breadth as a negative? We’ve done the work. PHDs have done the work. It’s been well documented that positive momentum and breadth is consistent with higher prices for stocks, not lower ones. They tend to stay strong, and not mean revert like some of these other items.
The put/call ratio, while noisy as hell and usually useless, fine. I get it. It means reverts.
Volatility too. Fine. I get that.
But Credit Spreads? The intermarket aspect I understand, but as a mean reverting sentiment gauge? No.
The difference in returns for stocks vs Treasuries? Again, like credit spreads, I get the intermarket relationship, but a mean reverting sentiment indicator? Hardly.
Of the 7, I’d argue maybe 2 of them make sense to include in a sentiment composite.
The other 5 are different tools and data sets for completely different purposes.
This is like a Pitcher trying to figure out which pitch to throw a hitter by looking at the color of his shoe laces. Or by choosing your vegetables at the store using the expiration dates in the milk aisle.
What does one have to do with the other?
And to be clear, this is not a political thing. I don’t care whether you love CNN or hate it. This could be the FOX Fear & Greed Index, or the MSNBC Fear & Greed Index and it wouldn’t matter to me. My point here is to break down its construction and figure out what’s in it, so we can decide whether it’s valuable to us or not.
My conclusion is that it is not. I believe it probably does more harm to investors than good.
So we ignore it.
How about you?
What do you think about this one?