What Is the CNN Greed Index and How Does It Work?

Investor sentiment influences financial markets, affecting stock prices and trends. CNN’s Fear & Greed Index tracks this sentiment by analyzing indicators that reflect investor behavior. By monitoring shifts between fear and greed, the index offers insight into whether investors are cautious or overly confident.

Components That Make Up the Index

The Fear & Greed Index consists of seven indicators, each measuring a different aspect of market behavior. Together, these components provide a broad view of whether investors are acting cautiously or aggressively.

Stock Price Momentum

This metric evaluates the S&P 500’s position relative to its 125-day moving average. Moving averages smooth out price fluctuations and highlight trends. When the S&P 500 trades well above this average, it indicates strong momentum and optimism. If it falls below, confidence may be weakening.

During economic expansions, the S&P 500 often stays above this average, reflecting bullish sentiment. In downturns, it struggles to remain above, signaling caution. This component helps determine whether the market is leaning toward excessive enthusiasm or growing apprehension.

Stock Price Strength

This indicator compares the number of stocks reaching new 52-week highs to those hitting 52-week lows on the New York Stock Exchange (NYSE). A higher number of stocks achieving new highs suggests broad market strength and positive sentiment. If more stocks are registering new lows, it indicates widespread weakness and nervousness.

In bull markets, a large percentage of stocks trade near their yearly highs, illustrating confidence. In market corrections, an increasing number of stocks hitting new lows signals declining sentiment. This measure helps assess whether optimism is concentrated in a few high-performing stocks or spread across the market.

Market Breadth

Market breadth evaluates the volume of advancing versus declining stocks on the NYSE. Strong breadth occurs when many stocks are rising, signaling broad participation in a rally. Weak breadth, where declining stocks outnumber advancing ones, suggests market gains may be driven by only a few large-cap stocks, signaling fragility.

If the market reaches new highs but only a handful of stocks contribute, overall confidence may not be as strong as it appears. When rallies are supported by a wide range of stocks across sectors, it signals a more sustainable trend. This component helps determine whether market movements are broadly supported or overly dependent on a few companies.

Put and Call Options

This measure analyzes the ratio of put options to call options. Put options allow the holder to sell an asset at a predetermined price, often used as protection against declines. Call options provide the right to buy an asset at a set price, typically signaling bullish expectations.

A higher put-to-call ratio suggests investors are purchasing more puts, indicating rising apprehension. A lower ratio, where call options dominate, reflects increasing confidence. If the ratio spikes during a downturn, it suggests strong demand for downside protection. A low ratio during a rally may indicate excessive optimism.

Junk Bond Market

High-yield, or “junk,” bonds are issued by companies with lower credit ratings, making them riskier investments. The spread between junk bond yields and safer government bonds measures investor appetite for risk. A narrowing spread suggests investors are more willing to accept risk, while an expanding spread signals increased caution.

During economic stability, the gap between junk bond and Treasury yields shrinks as investors seek higher returns. In uncertain times, such as financial crises, the spread widens as investors move toward safer assets. This indicator helps assess whether the market is embracing or avoiding riskier investments.

Market Volatility

Volatility is measured using the CBOE Volatility Index (VIX), often called the “fear gauge.” The VIX reflects expectations for future market fluctuations, with rising values indicating greater anticipated volatility. When the index is elevated, investors expect increased price swings, often correlating with market unease. Lower VIX readings signal a calmer market.

During financial crises, the VIX surges as uncertainty drives rapid price movements. In prolonged bull markets, the index remains subdued, reflecting stability. By tracking changes in volatility, investors can gauge whether sentiment is leaning toward stability or heightened nervousness.

Safe Haven Demand

This component evaluates shifts in demand for safer assets, such as U.S. Treasury bonds. When investors move funds into these assets, it suggests a flight to safety, often driven by concerns about market stability. Conversely, declining demand for risk-free assets signals a greater willingness to invest in higher-yielding, riskier assets.

In times of economic uncertainty, Treasury bond prices rise as investors seek shelter from volatility, driving yields lower. A declining demand for Treasuries suggests increasing confidence in riskier investments such as equities. This measure helps determine whether sentiment is shifting toward caution or optimism.

Interpreting Index Scores

The Fear & Greed Index operates on a scale from 0 to 100, with lower values indicating heightened fear and higher values reflecting growing greed. A reading closer to zero suggests widespread pessimism, often linked to declining stock prices and increased demand for safer investments. Scores nearing 100 signal exuberance, where investors may be taking on excessive risk.

Extreme fear readings often coincide with sell-offs and defensive positioning. While this may seem negative, such moments have historically presented buying opportunities for contrarian investors. If sentiment is overwhelmingly negative, much of the pessimism may already be priced into the market, potentially setting the stage for a rebound.

Conversely, extreme greed levels indicate optimism may have become excessive, with investors ignoring risks in pursuit of gains. This environment is often associated with overvalued stocks and speculative trading. While strong optimism can sustain rallies, it also increases the likelihood of sharp reversals if sentiment shifts due to unexpected economic developments or earnings disappointments.

Frequency and Data Sources

CNN updates the Fear & Greed Index daily, ensuring investors have access to the latest sentiment readings as market conditions evolve. This frequent recalibration reflects real-time shifts in investor behavior in response to economic reports, corporate earnings, geopolitical events, and Federal Reserve policy changes.

To compile the index, CNN relies on data from multiple financial exchanges and institutions. Put and call option data come from the Chicago Board Options Exchange (CBOE), providing insights into investor positioning in the derivatives market. Market breadth and stock price momentum figures are derived from the New York Stock Exchange (NYSE) and Nasdaq, capturing stock performance across sectors. The Volatility Index (VIX), which measures expected market fluctuations, is supplied by the CBOE. Bond market data come from corporate debt markets and Treasury yield spreads monitored by institutions such as the Federal Reserve and major bond rating agencies.