U.S. investors are grappling with “extreme fear” for the first time in six months, according to CNN’s Fear & Greed Index. Yesterday, the needle closed out the day in the “Extreme Fear” zone. Today, it is just on the edge of “Fear” and “Extreme Fear” this morning. So will the stock market crash?
Well, if you’re going by the sentiments of American investors as measured by CNN, maybe. Indeed, the index hasn’t hit the “Extreme Fear” portion of the gauge since March 15, following the collapse of Silicon Valley Bank.
The Fear & Greed Index takes into account a plethora of relevant economic data. This includes the Cboe Volatility Index (VIX), colloquially referred to as Wall Street’s “fear gauge,” which hit 18.70 on Wednesday, the highest level since late May.
Additionally, the index considers the five-day put-to-call ratio in options contracts. Put contracts are essentially bets against the rise of a stock’s prices, while calls typically predict an increase in the price of a given security by the contract’s strike date.
The ratio is currently hovering around 1.07, also the highest level since March. This shows that demand for puts has surpassed calls, a generally bearish indicator for stocks.
The index also evaluates the number of companies on the New York Stock Exchange trading at 52-week highs vs. 52-week lows.
What Does “Extreme Fear” Mean for a Stock Market Crash?
The recent crash in investor sentiment seems to be a part of a continued reaction to the Federal Reserve.
Investors have been siding with the bears since Fed Chair Jerome Powell iterated a “higher for longer” attitude in reference to elevated interest rates at last week’s policy meeting.
While the central bank chose to forego another rate hike at its sixth Federal Open Market Committee (FOMC) meeting of the year, Powell cautioned reporters that there is still work to be done to get inflation down to acceptable levels:
“Inflation has moderated somewhat since the middle of last year, and longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets. Nevertheless, the process of getting inflation sustainably down to 2 percent has a long way to go.”
Higher interest rates typically lower inflation at the expense of economic growth and unemployment.
If you recall, many economists predicted a recession would hit the U.S. at some point in the second half of the year based on the expected impact of rising interest rates and the movement of certain key Treasury curves.
The Fed’s statements served to confirm many investors’ beliefs that the economy — and stock market — are on the precipice of a major drawdown.
As a result of the Fed’s hawkishness, investors have been largely hitting the “sell” button. The S&P 500 dropped 1.6% the day after the Fed meeting, leading the index to a 2.6% weekly loss, the worst week for stocks since March.
With that said, at the time of writing, the S&P 500 is in the green at 0.3%, up 12.10% year-to-date.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
