The Bull/Bear Ratio, also known as the Bull-Bear Spread, is a market sentiment trading indicator that helps traders and investment advisors gauge the overall attitude of investors toward the stock market. This indicator is published weekly by Investor Intelligence, a financial data provider that tracks market psychology through a poll of investment advisors.
The ratio is a measure of market optimism and pessimism, showing how many financial advisors and planners are bullish or bearish on the market. By analyzing these readings, traders can gain insights into market tops or bottoms, helping them anticipate whether stock prices are likely to rise or fall.
To put it simply, imagine trying to predict the weather, if most people around you say it’s going to rain, you’d likely carry an umbrella. Similarly, the Bull/Bear Ratio aggregates the opinions of market professionals, revealing whether advisors expect the market to go up or down.
How Bull/Bear Ratio Works in Trading
The Bull/Bear Ratio is calculated by dividing the number of bullish advisors by the number of bearish advisors. If the ratio is greater than one, it indicates that more advisors expect the market to rise, meaning there is widespread bullish sentiment. Conversely, if the ratio is less than one, it suggests that more advisors expect a market decline, indicating bearish sentiment.
For example, if a survey of over 100 investment advisors finds that 75 are bullish and 25 are bearish, the Bull/Bear Ratio would be:
Historically, extreme readings in the Bull/Bear Ratio have coincided with market tops and bottoms. For example, when investor sentiment becomes excessively bullish, the market may be overbought, increasing the likelihood of a correction. On the other hand, extremely bearish sides can be used as a contrarian indicator, signaling that the market is oversold and due for a rebound.
Systematic Trading Perspective: Why Rules Matter
Systematic traders rely on technical analysis and many market sentiment indicators, like the Bull/Bear Ratio, to make investment decisions. Unlike discretionary traders, who often act on emotions, systematic traders use market indicators to establish objective rules for entering and exiting trades.
For instance, a trader might:
- Enter long positions when the Bull/Bear Ratio exceeds 1.5, signaling strong optimism among market participants.
Short the market when the ratio drops below 0.5, indicating widespread pessimism.
By backtesting these thresholds, traders can determine whether the Bull/Bear Ratio coincided with market tops or bearish sentiment historically, providing an edge in forecasting future market trends.
Challenges of Using Bull/Bear Ratio Indicator in a Trading System
While the Bull/Bear Ratio is just one of the many market sentiment indicators, it has limitations. A major challenge is over-reliance on extreme readings. Just because the market shows a bullish market sentiment doesn’t mean it won’t continue trending upward. Similarly, bearish sentiment doesn’t always guarantee an imminent rebound.
Additionally, this indicator is published weekly by the financial data provider Investor’s Intelligence, meaning it may lag behind real-time market movements. To improve accuracy, traders should combine the Bull/Bear Ratio with technical indicators like:
- Moving Averages – to confirm trend direction
- Relative Strength Index (RSI) – to measure overbought or oversold conditions
- MACD (Moving Average Convergence Divergence) – to track momentum shifts
By integrating multiple market indicators, traders can increase their confidence and reduce the risk of false signals.
Actionable Tips for Using Volatility Stops Effectively
Here are some actionable tips for using the Bull/Bear Ratio effectively in your trading strategy:
- Use as a Contrarian Indicator: Extreme readings in the Bull/Bear Ratio can be signals for contrarian trades. When the ratio is excessively bullish or bearish, consider taking the opposite position, as this may indicate that the market is nearing a reversal.
- Combine with Other Indicators: To increase the reliability of your signals, combine the Bull/Bear Ratio with other technical analysis tools. For example, use it alongside trend indicators or oscillators like the Relative Strength Index (RSI) to confirm potential buy or sell signals.
- Monitor the Ratio Regularly: The Bull/Bear Ratio is updated weekly, so it’s important to keep track of changes in sentiment. Rapid shifts in sentiment can signal emerging trends or potential reversals, making it a timely tool for swing traders.
- Set Defined Thresholds: For a more systematic approach, set clear thresholds for when the Bull/Bear Ratio triggers trades. For example, enter long positions only when the ratio is above 1.5 and short positions when it drops below 0.5.
Conclusion & Next Steps
The Bull/Bear market sentiment tool, while popular with some traders, is not an ideal quantifiable indicator for purely systematic strategies. It is typically based on surveys or subjective interpretations of market mood, which can be lagging, inconsistent, and difficult to test objectively over long historical periods. Unlike price or volume based indicators, sentiment tools often lack rigorous, rules-based definitions and are not grounded in replicable data, making them unsuitable for robust backtesting or rule-driven execution.
If you want to incorporate the Bull/Bear Ratio and other proven strategies into your trading approach, The Trader Success System offers structured guidance on systematic trading strategies. This program teaches you how to trade confidently, avoid emotional pitfalls, and navigate economic indicators like a pro.
