Just recently I explained to some extent what the Greed and Fear indicator is all about and how development and improvements are made over time. In the last couple of months I've been working on finishing up a new version that shows enormous improvements.
The way this is measured is by replaying history, and apply the indicator to each consecutive trading day. If the indicator made a correct call, the 'correct' index points are added to the G&F result, if the call was wrong, the 'wrong' index points are subtracted. You can read more about this way of measuring in 'how do the daily signals add up?' Replaying history (backtesting) is the best thing you absolutely need to do before actually using an indicator.
So what's the latest about the indicator? The chart below shows the simulated result of the Greed and Fear indicator measured in index points versus the S&P 500. Starting on January 2nd 2009 up until now, it shows an enormous outperformance. Note: this is unleveraged, so actual index points by picking the right moment to be short or long.
And although we had a huge bull market in the S&P 500, in this chart it almost looks flat. The S&P 500 went from +-1000 at the start of 2009 to little over 2300 now (March 2017). During that the same period the G&F indicator managed to climb to 7300!
Although this chart almost looks unrealistically good, there's one thing to worry about. As you can see in the chart, nowhere since the start of this simulation on Jan 1st 2009 has the G&F result (orange line) flattened out or dropped lower over more than a month or so, except for the last year. Since April 2016, the net result is going sideways to somewhat lower.
Overall this looks like a very nice and useful trading tool, but we have to keep a close eye on its recent performance. Work on the Greed and Fear indicator continues. (click chart for bigger version, new page will open)