Our "Fear vs Greed" Sentiment Index

November 18, 2025

We talk a lot about market psychology here.  You ever wonder if there was a way to measure that?

You know how your car has a temperature gauge on the dashboard?  It tells you if the engine is running hot or cold.  Well, the stock market has gauges like that.  Lots of them.  They don’t get talked about much.  They’re mostly too technical.   Most market watchers only want to hear if the Dow Jones is up or down.  

However, CNN Money has a “fear vs greed” index that they track.  It’s actually very sophisticated!   Here’s the link to their website on it. (https://www.cnn.com/markets/fear-and-greed).   They (or someone) collected a few of these temperature gauges and aggregated them in a useful way.

About 10 years or so ago, I thought I could take CNN’s version and tweak it.  So I started with CNN’s version and compared it to actual market performance.  Then I added some indicators and took others away.   So I came up with my own proprietary “fear vs greed index”.    You can see the chart of it below.  Yesterday, the market dipped into “fear” territory for the first time in several months.  

So, you might ask yourself: what’s the benefit of this?  Can’t we just look if the market is down to assess “fear”?  Not precisely.  The market is in “fear” territory now.  But let’s say that it stays at this level for the next 3 months.  Will we still be in “fear” zone at that point?   Maybe, but probably not.  The stressors driving the market lower may have disappeared by then.  The market level alone can’t tell you what’s happening under the hood.   In other words, your speedometer cant tell you how hot your engine is running.

Okay, but what’s the point?  Well, have you ever heard the phrase: “Sell when others are greedy and buy when others are fearful?”   Well, let’s see if that motto holds true.

Look at the table below.   This shows the market returns from the past 20 years, broken down into “fear” periods versus “greed” periods.  The average return was +1.5% in ALL 10-week periods.  But when you break it out by category, you get these 10-week average returns:

• Extreme fear: +5.1%

• Fear: +3.0%

• Neutral: +2.3%

• Greed: +0.4%

• Extreme greed: -0.4%

It’s far from 100% accurate.   But in general, the trend held that “fearful” periods outperformed the “greedy” periods.  At least, they did over this 20-year period.  If you look at the yellow column, you can see the annual difference in returns between the blue columns and the pink columns.

Now, two big disclaimers here.  

First,  past performance is not an indication of future results.  We are showing a historical pattern over the past 20 years.  That pattern may or may not repeat in the future.   People can lose (and have lost) a lot of money by betting that historical patterns will repeat.  Sometimes they do, sometimes they do not.  So keep that in mind.  In fact, I’ll just say it plainly: do not let this affect your investment decision.  This is more of an academic exercise.

Second, the phrase “sell when others are greedy and buy when others are fearful” might have worked for the MARKET over the past 20 years.  But it’s much less effective for individual stocks.  In fact, more often it’s the opposite.  When an individual stock is plummeting, it’s usually because there’s something wrong with that business. That’s different than measuring market-level psychology.  My point is: don’t apply the “fear vs greed” mindset to individual stocks.