When the market turns bearish, investors flee in panic, and greed is often at the root of "irrational exuberance," which can lead to stock market bubbles. When those emotions shift from fear to greed or vice versa, the stock market's direction can change. The Fear and Greed Index is based on the following premise:

Excessive fear can cause stocks to become oversold or undervalued, which is a buy signal.
Unrestrained greed can cause stocks to become overbought or overvalued, resulting in mass selling.

The Fear and Greed Index is a market sentiment indicator that gauges the prevailing emotions of investors in financial markets, particularly in stocks. It quantifies the levels of fear and greed present in the market, offering insights into potential shifts in investor behavior. The index considers various factors such as market volatility, trading volume, put and call options, and other sentiment indicators to calculate a numerical score. A high score indicates extreme greed, suggesting overbought conditions and a potential market correction, while a low score reflects extreme fear, signaling potential undervaluation and a buying opportunity. Traders and investors often use the Fear and Greed Index as a contrarian indicator, aiming to capitalize on market sentiment extremes. It serves as a valuable tool for assessing market psychology and making informed decisions based on the prevailing emotional climate.