The Fear & Greed Index Signals What's Next for the Stock Market
The Fear & Greed Index helps us to see what could happen to stocks next.
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You’ve probably been there. Sitting in an Uber, late for a flight, and the driver really thinks that of the two words on the SPEED LIMIT sign, LIMIT is the more important word.
I feel that way about the Fear & Greed Index right now.
I mean, the S&P 500 is within striking distance of an all-time high. And the Fear & Greed index is stuck in neutral, just like that Uber driver.
Go faster! Get greedy!
Why is the stock market stuck in neutral?
Simple, it’s a loss of momentum. This market is stuck in neutral. As Helene Meisler tells us in her latest Top Stocks, the market is choppy, trendless.
Most importantly, there’s a big negative divergence. And that’s rarely a positive.
The S&P 500's Momentum and Stock Market Breadth are Weak
The Uber driver is Market Momentum. It indicates fear. At first glance, even I thought that was odd. I mean, we’re near all-time highs. Mathematically, fear tells us that the S&P 500 is closer to the 125-day moving average than is normal. And that’s true. This market is rangebound. It’s not trendy. It’s gone nowhere since the election. It knows where the brakes are but can't find the gas pedal.
Breadth is the gas pedal and it indicates a lack of forward momentum. The difference between 52-week highs and lows on the NYSE is just about 0. For every new high, there’s a new low. It’s a bifurcated market. The haves vs. the have-nots. Volume looks a little better, with the McClellan Volume Summation Index rising, but stuck in neutral.
Speculation in the Options Market
Options are greedy. The Put/Call Ratio is very low. The VIX is neutral, but that’s only because the calculation I devised drops it out for anything but Fear readings. Traders keep buying calls because they’re bullish. That’s greedy. Traders are on the gas, but they're not committing enough capital to the market to move the needle.
Bond Market Investors Are Aggressive
The Bond Market shows no fear, either. I mean, stocks aren’t overbought relative to bonds, but junk bonds have continued their rise relative to investment-grade bonds. People just aren't worried.
Why is There a Divergence Between the Fear & Greed Index and the S&P 500?
So, this divergence between Fear & Greed and the S&P 500 is being driven by the stock market. Options and bonds are greedy, stocks are fearful. Combine those and you’ve got a "Neutral" Fear & Greed Index.
It’s like that Uber driver. In this case, we’re stuck in traffic. Rangebound. Choppy. There’s no chance to step on the accelerator, although the options traders and junk bond investors are trying.
What does it all mean? It’s a hard market to read. My experience with the Fear & Greed Index is that strong, trending markets get overbought above 75. Meanwhile, this market can't even find 60, which, I consider to be overbought in a down market. Caution is warranted. For now, play it as a trading range, with short-term bottoms occurring when Fear & Greed is around 20 and even better opportunities when you see positive divergences forming.
