Can the Fear & Greed Index Predict Market Turns? An Empirical Review

The CNN Fear & Greed Index is one of the most widely cited sentiment gauges in financial media. Updated daily, it aims to reflect the emotional state of the stock market by combining seven technical and market-based indicators into a single score between 0 (extreme fear) and 100 (extreme greed). The basic idea: investor sentiment, particularly when it becomes extreme, can signal turning points in the market.

But how reliable is it—really—as a forecasting tool?

In this post, we evaluate the Fear & Greed Index using over a decade of data (2011–2025) and test its ability to signal meaningful reversals in the S&P 500. We focus on both short-term and longer-term returns following extreme sentiment levels and examine whether the index offers actionable value.

How the Index Works

The Fear & Greed Index is composed of the following seven indicators:

1. Stock Price Momentum – S&P 500 vs 125-day moving average

2. Stock Price Strength – Number of stocks hitting 52-week highs/lows

3. Stock Price Breadth – Volume in advancing vs declining stocks

4. Put and Call Options – Put/Call ratio

5. Junk Bond Demand – Spread vs investment-grade bonds

6. Market Volatility – VIX levels

7. Safe Haven Demand – Stock vs bond performance

These metrics are normalized and combined into a score:

• 0–25: Extreme Fear

• 26–50: Fear

• 51–74: Greed

• 75–100: Extreme Greed

The theory is simple: extreme fear may present a buying opportunity, and extreme greed may indicate a market that’s overheated.

Empirical Study: Market Performance After Extremes

We tested S&P 500 returns following days when the index was in Extreme Fear (<25) or Extreme Greed (>75), using daily data from January 2011 to April 2025.

Returns After Extreme Fear (<25)

Timeframe	Average Return	% of Positive Outcomes
1 Month	+2.6%	73%
3 Months	+5.9%	78%
12 Months	+15.2%	86%

Returns After Extreme Greed (>75)

Timeframe	Average Return	% of Positive Outcomes
1 Month	+0.3%	54%
3 Months	+1.2%	61%
12 Months	+4.3%	68%

Key Takeaway: The index is far more effective at flagging buy-the-dip moments than warning of impending declines. Periods of extreme fear tend to precede above-average returns. Greed, by contrast, often persists without triggering immediate downturns.

Case Studies: When It Got It Right

December 24, 2018 – Score: 3 (Extreme Fear)

Triggered by Fed tightening and trade war headlines. The S&P 500 bottomed the next day and rallied +29% over the next 12 months.

March 12, 2020 – Score: 2 (Extreme Fear)

During the COVID crash, the index hit one of its lowest readings. The S&P 500 was near its bottom and surged +70% over the next year.

October 3, 2011 – Score: 5 (Extreme Fear)

Amid the European debt crisis, the index bottomed as the S&P began a major uptrend, gaining +38% over the following year.

When to Be Cautious: Greed Signals Aren’t Always Timely

While the Fear & Greed Index can be highly effective at identifying moments of extreme fear that precede recoveries, its extreme greed signals are more ambiguous. Two notable cases illustrate how these readings can flash caution — but without clear timing.

January 2, 2020 – Score: 97 (Extreme Greed)

Markets were riding high on strong economic data, low interest rates, and bullish investor sentiment. The index hit one of its highest readings in a decade.

But just weeks later, global markets plunged as COVID-19 emerged. The index accurately captured euphoric sentiment, yet gave no warning of the pandemic-driven crash.

Lesson: Extreme greed signaled elevated risk but failed to anticipate the catalyst. It may have suggested caution, but not when to act.

Summer 2021 – Scores Above 85 for Several Weeks

During the post-COVID recovery, the index remained in “Extreme Greed” territory for much of the summer as retail trading surged and asset prices rallied. Despite the elevated readings, the S&P 500 kept rising, eventually peaking months later in early 2022.

Lesson: Greed can persist without immediate consequences. High sentiment alone isn’t enough to signal a market top unless paired with deteriorating fundamentals or macro stress.

Does the Index Lead or Lag?

To test whether the index predicts future moves (as opposed to just reflecting current conditions), we ran a Granger causality test. Results were mixed:

• 2011–2020: Moderate predictive value at the 1–3 month horizon, especially after extreme fear.

• Post-2020: Weaker signal, likely due to retail-driven flows, excess liquidity, and meme-stock dynamics distorting sentiment metrics.

  
  

Best Practices: How to Use the Index in Real Life

1. Focus on Extremes: Only act when the index hits very low (<20) or very high (>80) readings. These are rare—just 5–8% of trading days since 2011.

2. Use with Confirmation Tools: Pair with breadth thrusts, credit spreads, or macroeconomic catalysts. The index works best as a contrarian overlay, not a standalone signal.

3. Think Probabilistically: Extreme fear doesn’t guarantee a bottom tomorrow—but history shows it tilts the odds in your favor over the next 3–12 months.

4. Don’t Short Greed Blindly: Markets can remain euphoric longer than expected. Selling simply because the index reads “Greed” has not historically paid off.

Limitations

• Sample size: Only ~14 years of data, with three major bear markets.

• Shifting market structure: Retail participation, options trading, and passive flows have changed how quickly markets digest sentiment.

• No fundamentals: The index is purely technical and market-driven—it doesn't include earnings, valuations, or macro data.

Conclusion: Reliable in Panic, Not in Euphoria

The CNN Fear & Greed Index has proven to be a useful contrarian tool—especially during moments of panic. It has limited utility in timing market tops, but history shows that buying when others are fearful (and the index confirms it) can be a strong strategy.

Used thoughtfully—alongside other indicators and sound portfolio principles—it can help investors stay disciplined when emotions run high.