Finance

Bull/Bear Ratio

Bull/Bear Ratio

The bull/bear ratio, also referred to as the bull-bear spread is an indicator of the market sentiment which is published weekly by the financial data provider Investor’s Intelligence, which uses information from polls answered by market professionals. It is an economic indicator published weekly by financial data firm investors intelligence that tracks market sentiments. If the ratio is greater than one then it’s a bullish sentiment and if the ratio is less than one then it is a bearish sentiment. Advisors expect the market to rise in bullish sentiments and hence the ratio is greater than one. In bearish sentiments, the advisors expect the market to fall and hence the ratio is less than one.

Get complete CFA Online Course by experts Click Here

How does the Bull/Bear ratio work?

Market sentiment is the general prevailing attitude of investors toward a particular financial security or market. It is shown with the activity and movements of prices of securities in that market. A bullish market contains rising prices and bearish market sentiment contains falling prices. The Bull/bear index shows the overall sentiments of financial planners and advisors who deal with the market every day. It shows what they feel about the stock market and what they would likely advise their clients.

How it is calculated?

When the reading is above 1 that means the advisors are bullish and when the reading is less than 1 that means the advisors are bearish. By dividing Bearish Investment Advisory by Bullish Investment Advisory you will get the Bull/Bear ratio.

Bull/Bear Ratio = Bearish Investment Advisors / Bullish Investment Advisors

Extreme readings on either the bullish or bearish sides can be used as constraining signals. The extreme readings above 60% or below 40% have coincided with market tops or bottoms. If the bull/bear ratio is greater than 1 it indicates that there are too many bulls in the market, and you should take a bearish stance. Whereas, if it is less than 1 it indicates that there are too many bears in the market, and you should take a bullish stance.

Example:

Suppose the investor intelligence surveys 100 investors in a given week. Out of these 100 investors, 28 investors are bullish and 72 investors are bearish. As per the formula the Bull/Bear Ratio can be calculated as

Bull/Bear Ratio = Bullish Advisors / Bearish Advisors

= 28 / 72

Bull /Bear Ratio= 0.39  

Since the ratio is low it will predict a Bullish future for the market.

Another example, suppose investor intelligence surveys another 100 people next week. Out of these 100, 75 are bullish and 25 are bearish. The calculation would be as follows

Bull/Bear Ratio = Bullish Advisors / Bearish Advisors

= 75 / 25

Bull/Bear Ratio = 3

Since the ratio is high it will predict a bearish future for the market.

Importance of bull/bear ratio:

The bull/bear ratio indicates the market’s sentiment and is an important tool in understanding market psychology. It is built on the responses from market experts and hence the ratio indicates the ‘feel’ of the market.

Swing traders can benefit from this data as it is published weekly and market sentiment is prone to fast changes. It is calculated by dividing the number of bullish respondents by the number of bearish respondents.

Get complete FRM Online Course by experts Click Here

Conclusion:

The bull/bear ratio is one of the many market sentiment indicators. It is based on survey responses of market experts like financial advisors and planners and gives the overall feel of the market. The bull and bear markets will have a large influence on the investments and hence it is better to take some time to determine what the position of the market is before making an investment decision. Remember, over a long term stock market has always posted a positive return as compared to the short term.

Authors – Abha Shetty and Saachi Lodha

About the Authors:

Abha is a second-year BMS student and FRM level 1 candidate. She is very intrigued by the world of financial markets and hopes to master the art of investing and trading.

Saachi is a passionate professional with knowledge of Accounting and Finance and currently exploring Financial Risk Management (FRM) to gain knowledge and exposure. As a part of the FRM course, she also writes blogs to explore the field more and deep dive into the content.

 

Related Post:

Bull Market

Bear Market

Market Cycle

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

15 − five =