Stock Market · Risk Management & Psychology

Fear & greed

Markets are driven by two emotions: fear and greed. Fundamental analysts study earnings. Technical analysts study charts. The truth is: prices are set by the balance of fear and greed at each moment.

The greed cycle

Markets rise → euphoria builds → 'this time is different' → retail investors pile in at the top → professionals start selling → crash begins.

Every major bubble, Tulipmania, Dot-com, 2008 housing, 2021 SPACs, followed this template.

The fear cycle

Markets fall → panic spreads → 'this will never recover' → retail capitulates at the bottom → professionals buy → recovery begins.

March 2020 COVID crash: Nifty fell to 7,500. Mutual fund SIPs were paused by retail investors. By 2024, Nifty crossed 25,000. A 3x recovery in 4 years.

> The crowd is usually wrong at extremes. The greatest investors learn to do the opposite of what they feel.

The Fear & Greed Index

CNN's Fear & Greed Index aggregates 7 indicators:

• Stock price momentum
• Junk bond demand
• Put/call ratio
• Market volatility (VIX)
• Safe-haven demand
• Stock price strength
• Stock price breadth

Scores below 20: extreme fear (often buying opportunity).

Scores above 80: extreme greed (often selling opportunity).

Indian retail behaviour

SIP inflows surge after market rallies and slow after crashes. The exact opposite of optimal. Disciplined SIP investing means investing the same amount regardless of emotion.

= Be fearful when others are greedy

= Be greedy when others are fearful (Buffett)

Takeaway. Markets cycle between fear and greed. Retail buys at greed peaks and sells at fear troughs. Exactly wrong. Use indicators like VIX and Fear & Greed Index as contrarian signals. SIP discipline beats emotional timing.