Fear vs. Greed Indicators Explained
Fear and greed indicators translate crowd sentiment into contrarian positioning signals. Institutional investors use quantified thresholds to identify regime extremes and adjust exposure.
| Metric | Fear Threshold | Greed Threshold | Historical Accuracy (12M Forward) |
|---|---|---|---|
| VIX | >30 | <12 | 68% (fear = buy signal) |
| Put/Call Ratio | >1.2 | <0.7 | 62% (extremes mean-revert) |
| AAII Sentiment (Bearish %) | >50% | <20% | 71% (contrarian indicator) |
| Fund Flows (4-week avg) | <-$15B outflows | >$30B inflows | 58% (reversal predictor) |
VIX >30 has occurred 8 times since 2008; 6 of 8 instances preceded 12-month rallies >15%. Put/call ratio >1.2 signals defensive positioning exhaustion—occurred March 2020 (VIX 82, put/call 1.5), followed by 70% rally over 18 months.
Signal Interpretation
- Confluence requirement — Single indicator = noise. Require 2+ indicators at extremes before acting. Example: VIX >30 AND AAII bearish >50% = high-conviction buy signal.
- Lag tolerance — Sentiment extremes can persist 4-8 weeks before reversing. Position-size accordingly: start with 25% of intended exposure, scale to 100% over 60 days.
- False positive awareness — Greed indicators can stay extreme during extended bull markets (2017-2018: VIX <12 for 18 months). Use valuation overlay (P/E >20 = reduce greed exposure).
- Regime classification — Fear (3+ fear indicators) = add 10% equity exposure. Greed (3+ greed indicators) = reduce 15% equity, raise cash. Neutral = maintain target allocation.
Position-sizing response: during March 2020 fear spike (VIX 82, AAII bearish 60%, outflows $50B), contrarian protocol increased equity from 60% to 70% over 90 days. Post-crash recovery generated 12% alpha versus staying static. Conversely, January 2022 greed signals (VIX 11, AAII bearish 18%, inflows $40B) triggered reduction to 50% equity, avoiding -18% drawdown.