3. Jargon Watch: Fear & Greed Index
Major downturns lately have spooked a lot of us who watch the markets, and if you want to quantify that fear, just turn to CNN's Fear & Greed Index (FGI). The tool compiles seven market measurements (including a similar and older fear index known as the CBOE Volatility Index, or VIX) to give the market sentiment a number between zero and 100. The higher the number, the greedier investors are acting. The lower the number, the more fear is driving market movement. This morning, the index was at 22—extreme fear.
In addition to the VIX, the FGI tracks six other data points. Each measures how much investors are trading and what they're trading. For example, if more investors are shifting away from stocks and toward bonds, that signals a growing fear about short-term performance. The index is a useful tool to add to an investor's tool belt. When the index shows that greed is high, prices could be inflated, and investors might want to wait before buying more stocks. Oppositely, intense fear can drive sell-offs that push the price below what a company is actually worth—presenting a good investment opportunity. Remember that the FGI is just one tool that should be used in combination with others. Irrational fear could present investment opportunities, but not all fear is irrational. – THE BALANCE and CNN