The Stock Market's Fear Index Is Up. Here's Why Smart Investors Aren't Selling.

With the war in Iran raging on, and questions abounding about whether the market is in an artificial intelligence (AI) infrastructure bubble, investors are increasingly nervous. The CNN Fear and Greed Index has moved into new territory over the last month, going from a rating of 44, indicating slight fear, to 15, representing extreme fear.

The Fear and Greed Index looks at seven different market indicators to try to gauge the current mood of investors. When investors are fearful, it can drive down stock prices, and when they are greedy, stock prices tend to rise. Six of the seven indications the index uses are now in the extreme fear territory.

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This includes measuring market momentum by looking at whether the S&P 500 is below its 125-day moving average, which it currently is. It also looks at the ratio of stocks hitting new 52-week highs on the New York Stock Exchange versus lows. That number is just above break-even, which is also categorized as extreme fear. The index's measurements of stock breadth and put and call options also fall into the extreme fear category, as do junk bond demand and safe haven demand, which it measures as the 20-day difference between stock and Treasury returns. The only indicator not in extreme fear territory is market volatility, as measured by the VIX and its 50-day moving average, which is showing just fear.

The Fear and Greed Index is an interesting tool with regard to market sentiment. It's noteworthy that the two times in the past year when the index plunged into the single digits were great buying opportunities. That's why smart investors aren't selling.

This happened in early April 2025, before stocks went on a great run until autumn. The Fear Index then hit single digits again in late November, signaling another bottom with the market closing out the year strong. Given the adage to buy stocks when others are fearful, this price action makes sense, and the index appears to be doing its job.

So, what should investors do?

I think investors should stick to their overall strategy. For me, a core part of this is to continue to consistently dollar-cost average into an index exchange-traded fund (ETF) like the Vanguard S&P 500 ETF (NYSEMKT: VOO). This fund tracks the S&P 500 (SNPINDEX: ^GSPC), and has been a consistent market winner over time. In fact, less than 15% of actively managed funds have been able to beat the S&P 500 index over a 10-year period. The ETF is also a better vehicle for dollar-cost averaging than individual stocks because it naturally lets its winners rise to the top.

Meanwhile, I think investors who also like to supplement their investment portfolios with individual stocks can track the Fear and Greed Index and look to load up on some of their favorite stocks if the index once again hits single digits. You can track the index here.

Geoffrey Seiler has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.