WHY the "Fear and Greed Index" Matters in Investing

Before diving into the numbers, it is crucial to understand why this index exists. It is rooted in the behavioral finance principle that market sentiment often overrides market fundamentals.

  • The Emotional Pendulum: Markets are driven by two primal emotions—Fear and Greed.

  • Extreme Fear can drive stock prices below their intrinsic value (Panic Selling). This often presents a buying opportunity.

  • Extreme Greed can drive stock prices far above their intrinsic value (FOMO - Fear Of Missing Out). This often signals a market correction is coming and may be a selling opportunity.

  • The Contrarian Indicator: The index is most valuable when used as a contrarian signal. As Warren Buffett famously said:

    "Be fearful when others are greedy, and be greedy when others are fearful." The index quantifies "others" so you can act against the herd.

2. Fear and Greed Index (The Standard)

The most famous version is the CNN Money Fear & Greed Index, which measures the sentiment of the U.S. stock market. It rates market sentiment on a scale of 0 (Extreme Fear) to 100 (Extreme Greed).

How It Is Calculated (The 7 Ingredients)

CNN uses seven equal-weighted indicators to calculate the final score:

  1. Market Momentum: The S&P 500 index compared to its 125-day moving average.
  2. Stock Price Strength: The number of stocks hitting 52-week highs vs. 52-week lows on the NYSE.
  3. Stock Price Breadth: The volume of shares trading in rising stocks vs. falling stocks.
  4. Put and Call Options: The ratio of bearish put options (betting on a drop) to bullish call options (betting on a rise).
  5. Junk Bond Demand: The spread (difference) between yields on investment-grade bonds and "junk" (high risk) bonds. (Smaller spread = Greed/Risk-on).
  6. Market Volatility (VIX): The "fear gauge" measuring implied volatility.
  7. Safe Haven Demand: The difference in returns between stocks and "safe" treasury bonds.

3. Fear and Greed Index for KOSPI

Unlike the U.S. market, there is no single "official" CNN Fear & Greed Index for KOSPI that is universally cited by all major Korean news outlets. However, several financial data providers and analysts calculate their own versions using localized data.

Who Provides It?

  • CryptoKorea: It provides a comprehensive index calculated using 7 specific sub-indicators tailored to the KOSPI market:
    1. Market Momentum: Compares the KOSPI 200 against its 125-day moving average. (Above = Greed/Momentum; Below = Fear).
    2. Stock Price Strength: Compares the number of KOSPI stocks hitting 52-week highs versus those hitting 52-week lows.
    3. Stock Price Breadth: Analyzes trading volume in rising stocks versus falling stocks within the KOSPI 200.
    4. Put and Call Options: Measures the ratio of bearish Put options to bullish Call options (Ratio > 1 indicates Fear).
    5. Market Volatility: Tracks the expected volatility of KOSPI 200 options over the next 30 days (High volatility = Fear).
    6. Safe Haven Demand: Measures the performance difference between bonds and stocks over the last 20 trading days.
    7. Junk Bond Demand: Tracks the yield spread between high-risk bonds and safe government bonds (Narrow spread = Greed).

What Drives the KOSPI Version?

Since the U.S. indicators (like the NYSE flow) don't apply, a KOSPI Fear & Greed index is typically built using these Korean equivalents:

U.S. Component KOSPI Equivalent Component
VIX (Volatility) VKOSPI: The volatility index of the KOSPI 200 options. A high VKOSPI indicates high fear in the Korean market.
Safe Haven Demand KRW/USD Exchange Rate: In Korea, a surging exchange rate (weak Won) is often a proxy for "Fear" and capital flight.
Put/Call Ratio Foreign Investor Net Selling: Foreigners hold a massive sway over KOSPI. Heavy foreign selling is a major "Fear" input; heavy buying is a "Greed" input.
Market Momentum KOSPI vs. 60/120-day Moving Average: Measures if the index is overextended.
Credit Spread Corporate Bond Spreads (Credit Spread): The difference between AA- corporate bonds and government Treasury bonds (KTB).

Summary for Investors

If you are investing in KOSPI, you cannot simply look at the CNN Index (US) and apply it to Samsung Electronics. You must look at VKOSPI, Foreigner Net Buying trends, and the Won/Dollar exchange rate to gauge the true fear or greed level in the Korean market.

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