How to use market sentiment in investing

There are many ways to measure market sentiment. The most simple and easiest way is to look at the CNN Fear & Greed Index. This useful indicator provides a quick and free overview of market sentiment by incorporating seven different sentiment indicators, including measures of momentum, market breadth and the put-call ratio for options.

Investor sentiment goes up and down throughout a year. As a general rule, the F&G Index tends to reach extremes about twice a year.

Here is how you read the F&G Index:

– Exactly one week ago the F&G Index stood at 89. It rated the market as being in “extreme greed” mode.
– When The indicator enters “extreme greed” at 80 or above, do not buy any stocks.
– Once the indicator gets above 90, the market is due for a sharp sell-off.
– If the indicator falls below 20, then start looking at adding to positions.

Lat week’s F&G Index reading marks one of those opportunities where you can profit from extremes in market sentiment.

Sven Franssen