Schaeffer's Trading Floor Blog

Fear, Greed, and All Things Ukraine

Is this fear and greed tracker a good contra-tell?

by 3/4/2014 7:30 AM
Stocks quoted in this article:

I use the CBOE Volatility Index (VIX) and VIX derivatives all the time as fear and greed proxies, mainly because I've spent 400 years or so in options, and it's what I'm familiar with. But of course, there's a whole world of indicators out there, some of which tell us a similar story and some of which don't. Sometimes there's a time lag associated with one indicator, whereas another may reflect sentiment more contemporaneously.

Anyways, I was reminded via a tweet from Paul La Monica yesterday that CNN runs a "Beta" version of an interesting Fear and Greed Index. It includes a "Market Volatility" component (it basically looks like that's just based on absolute value of the VIX) as well as a put/call component (volume based), plus five other factors.

It's pretty clearly going to lag a little bit. Here's how it looked yesterday morning not much after the market gapped down 1% on All Things Ukraine.

Fear and greed index as of March 3

We hadn't quite flipped off the "greed" switch. Of course saying it "lags" is all relative. The markets had like an hour to react to Ukraine. No matter what the market does from here going forward, it's pretty clear the numbers on an index like this are going to dip and it will show some sign of fear.

So that leads to the obvious conclusion that a gauge like this has to serve as a contra-tell, right? I mean, look at those numbers on the right. We hit Extreme Fear one month ago, and that turned into a decent buying opportunity.

Well, they run a graph of the index, and it's not enormously clear (partly because they calibrate the X-axis kind of loosely).

Fear and greed over time since 2011

Well, we can make out some big fear moments, and in the general sense, they were good buying opportunities. We see the smackdown in August 2011, and the April (Boston Marathon bombing) and June (Taper Tantrum) fear spikes. We don't really see the late-2012 VIX spike, however.

Remember also, we have the benefit of hindsight looking at this graph. Take that big dip in the first half of 2012, for example. The index flipped into a bit of fear and then turned up, which at the time might have looked like a good contra-tell. And then fear exploded. So not sure how well that signal worked, but I'm guessing it would have gotten someone in a little early.

As to more recent developments, the fear spike just last month looks pretty extreme considering the market didn't dip all that much top to bottom. So maybe the best way to use this indicator is subjective within the context of the market backdrop.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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