Fear and Greed Indicators
The Two Forces That Move Markets
Warren Buffett famously said: “Be fearful when others are greedy, and greedy when others are fearful.” This wisdom captures the essence of sentiment analysis. Fear and greed are the twin engines of market movement, and learning to measure them transforms your trading from guesswork into probability assessment.
Every price tick represents a battle between these emotions. When fear dominates, assets get cheap. When greed takes over, they get expensive. Your job is to recognize which force is in control.
Key Fear Indicators
When markets crash, these tools measure the panic:
VIX (Volatility Index)
Measures expected 30-day volatility
Readings above 30 indicate elevated fear
Spikes above 40 signal extreme panic
Sustained lows suggest complacency
“The fear gauge” of the market
Put/Call Ratio
Compares put buying to call buying
Ratio above 1.0 shows fear (more puts)
Extreme readings above 1.5 mark capitulation
5-day moving average smooths noise
Available for individual stocks and indices
AAII Sentiment Survey
Weekly survey of individual investors
Bullish, bearish, and neutral percentages
Extreme bearish readings (>50%) are bullish signals
Extreme bullish readings (>60%) are bearish signals
Free data with decades of history
Safe Haven Flows
Treasury bond buying surges
Gold and silver demand increases
Dollar strength in forex markets
Defensive sector rotation
Risk asset correlation approaches 1.0
CNN Fear & Greed Index
One of the most accessible sentiment composites:
Components (Equally Weighted):
Market Momentum (S&P 500 vs 125-day MA)
Stock Price Strength (new highs vs lows)
Stock Price Breadth (advancing vs declining volume)
Put/Call Ratio (5-day average)
Junk Bond Demand (spread vs investment grade)
Market Volatility (VIX and 50-day MA)
Safe Haven Demand (stocks vs bonds)
Reading the Index:
0-20: Extreme Fear (potential buying opportunity)
21-40: Fear (caution, watch for reversal)
41-60: Neutral (trend continuation likely)
61-80: Greed (caution, watch for topping)
81-100: Extreme Greed (potential selling opportunity)
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Key Takeaways
Fear and greed drive all market movements
VIX is the most widely watched fear gauge
Extreme readings in either direction create opportunity
Contrarian trading works best at sentiment extremes
Combine multiple indicators for reliable signals
Sentiment analysis works best with price confirmation
The market will always swing between fear and greed. Your edge comes from recognizing where we are in that cycle and positioning accordingly. When others panic, stay calm. When others celebrate, stay cautious.
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