9. The big picture: macro, markets and news

Sentiment and market valuation (FNG, VAL)

FNG shows a fear-and-greed gauge built from seven market signals, and VAL shows whole-market valuation ratios against their own history.

  • 4 min
  • 3 questions
  • Lesson 6 of 6

Why you would care

Is the market fearful or greedy, and is it cheap or expensive? Sentiment and valuation are the two thermometers of the market. Fear at extremes often comes near lows; greed near highs. High valuations mean lower long-run returns on average. Neither tells you what happens next month. Both tell you what kind of market you are in.

The idea from scratch

Sentiment

Sentiment is how optimistic or fearful investors feel. A fear and greed index combines several measurable signals into one number, typically: market momentum, the share of stocks at new highs vs lows, breadth, put/call ratios, volatility (VIX), demand for safe bonds vs stocks, and junk bond spreads. 0 to 25 extreme fear, 75 to 100 extreme greed.

Many investors read it contrarian: "be fearful when others are greedy". It is a mood reading, not a timing tool.

Market valuation

The same ratios as for one company (chapter 04), applied to the whole market:

Buffett indicator
Total stock market value / GDP
CAPE (Shiller P/E)
Price / average of the last ten years of inflation-adjusted earnings
Equity risk premium (excess CAPE yield)
Earnings yield (1 / CAPE) minus the real bond yield: what stocks pay over safe bonds
Tobin's Q
Market value / replacement value (a proxy)
Dividend yield
Dividends / price for the S&P 500
Margin debt / GDP
Borrowing to buy stocks, relative to the economy
Diagram: 7 market signals leads to Fear and greed 0-100; Market cap, earnings, GDP, rates leads to Valuation ratios; Valuation ratios leads to Zones vs own history; Fear and greed 0-100 leads to Mood; Zones vs own history leads to Long-run expectations.

See it in Gloom

Gloom screenshot: FNG: the gauge at 36 (fear), with the previous close, one week, one month and one year ago, and one year of history
FNG: the gauge at 36 (fear), with the previous close, one week, one month and one year ago, and one year of history. Historical example.

open themtype FNG and VAL.

  1. FNG 36: fear. 1 week ago 30, 1 month ago 60: sentiment swung from greed to fear in a month.
  2. The history line: extreme fear lows in late 2025 and March 2026, greed peaks in May.
Gloom screenshot: VAL: whole-market valuation indicators with value, zone and a richness percentile; the Buffett indicator charted over 25 years
VAL: whole-market valuation indicators with value, zone and a richness percentile; the Buffett indicator charted over 25 years. Captured 2026-10-06 (historical example).
  1. VAL Buffett 335% Sig. over 100: total equity value is 3.35 times GDP, the richest on record in the window.
  2. CAPE 40.6, ERP (ECY) 1.0%: expensive, with a small premium over real bond yields.
  3. Div yield 1.1%: low, consistent with high prices.
  4. The zone bar: undervalued to overvalued; the marker at the far right.

Practice and recap

Try it3 tasks
  1. Is the FNG reading in the screenshot fear or greed? (Fear, 36.)
  2. CAPE 40: earnings yield? (2.5%.)
  3. Why can a market stay "significantly overvalued" for years? (Valuation predicts long-run returns, not timing; earnings can grow into prices.)
Common mistakes4 mistakes
  • Using sentiment or valuation to time the next week.
  • Comparing CAPE across eras without noting accounting and interest-rate changes.
  • Reading "fear" as "about to rise".
  • Forgetting that all these ratios can stay extreme for long periods.
Check yourself3 questions
  1. What does the fear and greed index combine?
  2. What is CAPE?
  3. What does the Buffett indicator compare?
Answers
  1. Several market signals (momentum, breadth, options, volatility, safe-haven demand, junk bond spreads) into one 0-100 score.
  2. Price divided by ten years of average inflation-adjusted earnings.
  3. The total value of the stock market to the size of the economy (GDP).
Words in this lesson7 words
sentiment
How optimistic or fearful investors feel.
contrarian
Doing the opposite of the crowd's mood.
Buffett indicator
Total stock market value / GDP.
CAPE (Shiller P/E)
Price / 10-year average real earnings.
equity risk premium
What stocks are expected to pay over safe bonds.
Tobin's Q
Market value / replacement value of assets.
margin debt
Money borrowed to buy securities.

Educational material about reading market data, not investment advice.