What is bull and bear in investing
Sentiment indicators herald a trend reversal
What about the stock markets? Will the mood soon turn, and if so, then in which direction? These questions reflect an effort to buy cheap when prices are low and exit when high.
Bull / Bear Ratio - optimists versus pessimists
Anyone who trades countercyclical with the contrarian strategy can make profits before the stock market trend turns. However, a look at the index level alone is not enough to estimate this. There are sentiment indicators such as the bull / bear ratio, which shows the ratio of optimistic to pessimistic investors.
The weekly analysis by the US stock exchange service "Investors Intelligence" is one of the most popular internationally. The percentage of over 100 surveyed bullish and bearish asset managers is measured. Every Wednesday the figures are published that are representative of the expectations of the stock exchange traders. With bull / bear ratio values above 1, the bulls dominate, including the bears.
Weekly survey results
A bull / bear ratio is determined by simply dividing the number of bulls by the number of bears. An example illustrates the procedure: Assuming 100 respondents are 18 bullish and 82 bearish, the result is a value of 0.22 points. But if 70 are bullish and 30 are bearish, the value is 2.33 points.
For a contrarian going against the tide, the first low value is a buy signal. The second value is more of a sell signal, whereby the extreme values can be above 3 points. Buy when everyone is pessimistic, sell when everyone is optimistic, the logic behind this is explained as follows:
The more optimists are positioned, the more likely the market is oversold, there are hardly any potential buyers - the price can no longer rise. Conversely, if the pessimists have the upper hand, i.e. the majority is underinvested, no additional selling pressure can arise. This makes these sentiment indicators like the bull / bear ratio contra indicators. They indicate whether a trend reversal is imminent.
In addition to the bull / bear ratio from Investors Intelligence, there are a number of other sentiment indicators. In Germany, for example, Deutsche Börse surveys 150 institutional investors every week and publishes the Dax-Bull / Bear Index. The ratio between optimists and pessimists is weighted with the total number of respondents. The result is values between 0% and 100%.
Interpret indicators correctly
In retrospect, it turns out that the market has actually developed mostly contrary to the prevailing sentiment. However, sentiment indicators should be used with caution. It starts with the fact that the surveys are always a week ago.
That is why the put-call ratio is usually used in parallel. This is about the ratio of bought and sold purchase options. Here, too, higher values are a sell signal and vice versa.
However, the use of these indicators is difficult, especially in pronounced trend phases, as they generate signals at an early stage. As an investor, you run the risk of acting too early or too late. In the event of a strong upward movement, for example, considerable shares are sometimes missed.
Overall, the contrarian strategy with sentiment analysis is a challenge. Firstly, the indicators have to be continuously monitored, and secondly, the ideal time to trade is difficult to find.
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