Readers of our blog know quite well about an interesting indicator CNN has that’s called the Fear and Greed Index. It goes from 0 to 100, with 0 being extremely fearful that the world is probably going to end very soon, and 100 being extremely greedy, with everyone expecting everything to keep going right and nothing to go wrong as far as the eye can see. It usually trades between 20 to 80. Back on 12/24/2018, at the lows for the market (which I call The Nightmare Before Christmas), this gauge went to a value of 1 (very fearful). Shortly after that, the market rallied 30%+ in 2019, partly due to the Federal Reserve reversing course and loosening monetary policy instead of tightening it. In early 2020 (January 2, 2020), this gauge went to 97 (very greedy), and over the next month, the momentum train kept running and the market continued to make new highs, until the market caught a bad case of the flu and flew over a cliff.
Now that the market has gone from all time highs to fall into bear market territory in just 16 trading days (the entire world index is down about 25% year to date), guess where this Fear and Greed gauge is today? It’s at 2.
To add to this, we are now 3 standard deviations below the average trading price of the stock market. And another indicator I use to track fear and greed (called RSI, which can be seen at the bottom panel in the chart below) is at a level that shows the market is “oversold” (meaning it has fallen too far, too fast). The RSI is considered “overbought” when it’s above 70, and oversold when it’s below 30. It’s currently at 24.77. When markets hit extremes like this, that’s when they typically find turning points, as indicated by the vertical lines, which point to areas where RSI fell below 30.
So, here we are again, where historically, it is an area where owning stocks has tended to be profitable because fear has washed out the sellers and there is almost nobody left to sell.
It’s likely your portfolio may be out of balance now because the stock portion has gotten beaten up. For a neutral 50% stock / 50% bond portfolio, it could be 45/55 right now. It’s a good time to use this drop to rebalance and to bring your portfolio back to your neutral allocation targets. Continue to stay calm and be willing to buy into this storm, even if it’s difficult. History suggests you will be rewarded for it.