Stocks, bonds, futures, options always move, to understand where they might go we can use Bull/Bear Ratio to measure market sentiment.
What is sentiment? Market sentiment represents the moods (emotion, greed, hope, fear, excitement, frustration) of investors, this happens when they have to make decisions influencing market trends.
You may have seen a trading book or volumes of a futures splashing up/down, these are mechanisms triggered by so many traders who are doing the same thing, confidence and exaltation in the trends direction take over.
Other examples of sentiment’s change can come from news such as a downgrade of rating agency, a tweet from the president of the United States, a terrorist attack…, creating different moods in traders. It is the fight between bulls and bears, between optimists and pessimists, between informed and uninformed traders, big investors vs small investors, in a word are the feelings of the “community”.
An important tool for understanding sentiment is Bull/Bear Ratio. It is a market profile indicator invented in the 1960s by A. Cohen with the publication of a weekly survey (Investor Intelligence Sentiment survey), aimed at 100 professionals such as investment advisors, business banks and institutional investors.
At the base of Bull/Bear Ratio, its inventor Cohen wanted to do a survey in the environment of “strong hands” to understand whether the majority had a bullish or bearish view.
The survey formula is calculated in a simple way
Bull/Bear Ratio – Bullish Investments / Bearish Investments, if the result is greater than 1, means a bullish sentiment, while if lower than 1 bearish.
Personally I use this report for indicative purposes, it is a thermometer to understand how big investors think, be careful because someone in the test could lie to hide their strategies, another limit is the time between the survey (Friday) and the publication date (Wednesday) with a psychological and technical delay.
Bull/Bear Ratio as a whole is useful when trading to understand the sentiment of “strong hands”, reading chart is important even if it is often a bit different, in my opinion it must be accompanied with indicators of technical analysis or macroeconomic data.
Understanding sentiment is not easy but from today you will have an extra tool, in some cases it will prevent you from making rash choices conditioned by emotions. I would say a small tool to add to the toolbox, I end with 5 points to follow:
- Have an idea of market perception by large investors
- Analyze Bull/Bear Ratio chart
- Analyze Volatility Index (Vix)
- Analyze macroeconomic data
- Analyze volumes for further signals from the market
Find these report on: https://www.investorsintelligence.com/x/us_advisors_sentiment.html report or https://www.yardeni.com/.