Stock markets are governed by market sentiment. Knowing investor psychology and financial history will get you a lot further in stock market investing than, mastering Nobel Prize-winning capital asset pricing models.
It is tough to make predictions, especially about the future but certain patterns recur that give experienced investors an edge.
For many years, measuring investor sentiment was a matter of simply doing the opposite of what the headlines told you. But today, a simple measure of investor sentiment is the CNN’s Fear & Greed Index. A composite of 7 underlying indicators, the Fear & Greed Index provides a reliable, “quick and dirty” insight into Mr. Market’s current mood.
Over time, the F&G Index has fallen below 20 an average of about twice per year and every time “extreme fear” turned out to be a great opportunity to buy stocks.
All seven indicators have been in bearish territory, 6 of them in “extreme fear.” The overall index was at 16. Now, it seems the indicators are changing. Today we stand at 23 and only 3 indicators are in extreme fear and one even turned to neutral.
Investing in the stock market during times of extreme fear is challenging and often considered too risky. But combine your knowledge of market history, investment psychology and the Fear & Greed Index, and you come to one conclusion: Now is another long term buying opportunity.
Sven Franssen