Fear & Greed Index Explained

The Fear & Greed Index is a composite sentiment indicator that combines multiple stress measures into a single 0-100 score. It helps you understand whether markets are driven by fear or greed at any given moment.

This article explains VantMacro's version of the index, what goes into it, and how to interpret it.

What is the Fear & Greed Index?

The Fear & Greed Index measures market sentiment on a scale of 0 to 100:

Key insight: Sentiment extremes often occur at market turning points:

• Extreme fear can signal capitulation (potential buying opportunity)
• Extreme greed can signal complacency (potential correction ahead)

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VantMacro's Components

VantMacro calculates Fear & Greed using four institutional-grade inputs:

1. Market Volatility / VIX (35% weight)

What it is: The CBOE Volatility Index (VIX)—known as "the fear gauge"

Scale:

• VIX < 15: Low fear (greed territory)
• VIX 15-25: Normal
• VIX > 25: Elevated fear
• VIX > 40: Panic

Why it matters: VIX measures expected S&P 500 volatility over 30 days. High VIX = market expects turbulence.

2. High Yield Spread (25% weight)

What it is: The spread between high-yield corporate bonds and Treasuries (HY OAS)

Scale:

• < 300bp: Tight (greed)
• 300-500bp: Normal

• 500bp: Wide (fear)

• 800bp: Stress

Why it matters: Credit spreads reflect how much investors demand for taking default risk. Wide spreads = fear of defaults.

3. NFCI (25% weight)

What it is: Chicago Fed National Financial Conditions Index

Scale:

• < -0.5: Loose conditions (greed)
• -0.5 to +0.5: Near normal

• +0.5: Tight conditions (fear)

Why it matters: NFCI combines 105 financial indicators (rates, spreads, leverage). It's the broadest measure of financial conditions.

4. STLFSI (15% weight)

What it is: St. Louis Fed Financial Stress Index

Scale:

• < 0: Below-average stress (greed)
• 0 to 1: Normal

• 1: Above-average stress (fear)

• 2: High stress

Why it matters: STLFSI is a composite financial stress measure and tends to respond to market dislocations (with weekly update frequency).

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Methodology

Each component is normalized to a 0-100 scale, then weighted:

Fear & Greed Score = 100 - (
    VIX_normalized × 0.35 +
    HY_normalized × 0.25 +
    NFCI_normalized × 0.25 +
    STLFSI_normalized × 0.15
)

The subtraction inverts the score: high stress readings become low scores (fear), low stress becomes high scores (greed).

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How to Interpret It

As a Contrarian Indicator

Important: This is context, not a timing signal. Extreme readings can persist for weeks.

As Regime Context

Fear & Greed feeds into VantMacro's Market Risk dimension:

This helps determine the composite regime classification.

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Historical Context

The Fear & Greed score is a transformation of the underlying components, so “extremes” depend on the normalization bounds and the slow/fast update frequencies of the inputs (e.g., NFCI/STLFSI are weekly).

Using VantMacro’s current formula and normalization ranges, here are a few computed examples:

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Differences from CNN Fear & Greed

VantMacro's index differs from CNN's popular version:

VantMacro's version emphasizes credit and financial conditions—more aligned with macro regime analysis.

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Limitations

1. Not a Timing Tool

Extreme readings can persist. Fear can become "more fear" before reversing.

2. Backward-Looking

The index reflects current conditions, not future ones.

3. Context Matters

Extreme fear during a genuine crisis (2008) is different from a short-term dip (2018).

4. Component Correlation

During major stress events, all components move together. Diversification within the index is limited when it matters most.

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How to Use It

As Context, Not Signal

1. Check the regime first — What's the overall macro environment?
2. Then check sentiment — Is there fear or greed relative to fundamentals?
3. Look for divergences — If fundamentals are improving but fear is extreme, that's notable.

Combine with Other Signals

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Summary

Score interpretation:

• 0-25: Extreme Fear (potential contrarian buy)
• 75-100: Extreme Greed (potential contrarian caution)
• 45-55: Neutral

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Data Sources

• FRED series: VIX (VIXCLS) — https://fred.stlouisfed.org/series/VIXCLS
• FRED series: High Yield OAS (BAMLH0A0HYM2) — https://fred.stlouisfed.org/series/BAMLH0A0HYM2
• FRED series: Chicago Fed NFCI (NFCI) — https://fred.stlouisfed.org/series/NFCI
• FRED series: St. Louis Fed Financial Stress Index (STLFSI4) — https://fred.stlouisfed.org/series/STLFSI4

Further Reading

• Market Regimes Explained — How sentiment fits into regime analysis
• Yield Curve Inversions — Another stress indicator

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Track Sentiment on VantMacro

• Real-time Fear & Greed score with component breakdown
• Historical trend analysis
• Integration with regime classification

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