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the Bull /Bear Ratio: A Contrarian Indicator

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The Bull/Bear ratio, a market indicator popular with insiders, is a poll of investment professionals that gauges whether they are bullish, bearish, or neutral on the stock market. The weekly publication by Investor’s Intelligence is considered the most relevant measure of market sentiment as participants have daily dealings within the financial markets.The ratio shows the relationship between bullish and bearish advisers and is interpreted to be a contrarian indicator, since extremes in either direction are signals of a reversing market trend.

High readings of the Bull/Bear Ratio are bearish and low readings are bullish.

The theory behind using this indicator is that people tend to be bullish after they buy, and bearish when they sell. So if the BB ratio were to register an extreme bullish reading it would be considered a reflection of an unhealthy level of buyers over sellers and would make for a biased and uneven market place, which by contrarian views would be set for a correction.

A rising trendline means bullish sentiment is outpacing bearish sentiment. The 2.00 area is associated with bullish extremes and market tops, and the 0.60 area with bearish extremes and market bottoms.

According to Investors Intelligence, “Historically, bulls are 55%-60% when indexes achieve record highs, and those extreme levels of optimism often prove negative. They reflect fully invested positions. High levels of bearishness are usually positive because they most often occur after a major market decline, and reflect that there is plenty of cash on the sidelines."

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re-posting of original article posted in November of 2008




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