What it means
The ratio comes from regular sentiment surveys of professional market writers, advisers or investors, who are each recorded as bullish, bearish or neutral. Dividing the bullish count by the bearish count gives one number that captures the mood of the crowd.
It is published weekly by several research houses, and the level matters far less than the direction it has been travelling. What makes it useful is that it is a crowd measure rather than a company measure.
Earnings, cash flow and order books tell you about a business; the bull/bear ratio tells you what other people already believe about the market those businesses trade in. That is valuable precisely because prices already reflect the consensus, so knowing how stretched the consensus is tells you how much room there is for surprise.
Most practitioners read it as a contrarian signal, meaning they lean against it rather than with it. A very high ratio suggests complacency, with few buyers left to come in and plenty of people who could be forced to sell, while a very low ratio suggests fear has done its work and bad news is already in the price.
Readings around the extremes get far more attention than the ordinary middle ground. It is used alongside other mood indicators rather than on its own.
Analysts typically chart it over several years, mark the levels at which it has previously turned, and compare it with measures such as option put/call volumes and volatility indices. A single week's figure is noisy, so a four-week average is common.
The nuance is that sentiment can stay stretched for a long time. A high ratio during a strong, earnings-driven market can persist for months and anyone who shorted the market purely on that signal would have suffered.
Different providers also survey different populations, so the ratio from one survey is not directly comparable with another's.
In practice
Real-world examples.
Example
A pension fund's investment committee sees the bull/bear ratio climb above 3.0 for the third week running while its own equity weighting is at the top of its permitted range. The committee does not sell out, but it does trim equities back to the middle of the range and raise its cash buffer.
Example
A financial adviser is talking a nervous retired client out of selling everything after a sharp market fall. She shows him that the ratio has dropped below 1.0, explains that this has historically coincided with poor sentiment rather than poor long-term returns, and they agree to make no change for a quarter.
Example
A trading desk at a small brokerage builds the ratio into a weekly dashboard alongside put/call volume and a volatility index. When all three point to extreme optimism at once, the desk reduces the size of new long positions rather than reversing them.
Formula
Calculation
Bull/Bear Ratio = number of bullish respondents / number of bearish respondents
Worked example. A weekly survey receives 200 replies. Of those, 90 are bullish, 30 are bearish and 80 are neutral or expect a short correction.
Bull/Bear Ratio = 90 / 30 = 3.0
The same answer appears if you use percentages: 90 out of 200 is 45% bullish and 30 out of 200 is 15% bearish, so 45% / 15% = 3.0.
A reading of 3.0 means there are three optimists for every pessimist, which most analysts would treat as a crowded, one-sided market. If the following week 60 respondents turn bullish and 60 turn bearish, the ratio falls to 60 / 60 = 1.0, a balanced reading, and the four-week average would be dragged down sharply by the change.Case study
Seen in the real world.
This is an illustrative and fictional example. Kestrel Lane Advisers runs a cautious balanced fund and has a written rule that sentiment readings can change position sizing but never the fund's strategy. Over six weeks the bull/bear ratio from the survey it follows rises from 1.4 to 3.2, its highest level in two years, while valuations also look full.
Under the rule, the manager cuts his single largest equity holding from 7% of the fund to 5% and holds the proceeds in short-dated government bills. Markets carry on rising for another two months, which costs the fund a little performance, and he records that cost honestly in the quarterly letter. When the market then falls 12% over three weeks, the cash gives him the means to buy back in, and his letter makes the point that the signal was about preparedness rather than prediction.
Watch out
Common mistakes.
- Treating the ratio as a timing tool that says sell today. Extremes can persist for months, so it signals a condition rather than a date.
- Comparing readings from two different survey providers as though they were the same series, when the populations surveyed and the definitions of bullish differ.
- Ignoring the neutral respondents, who can be the majority, and so overstating how one-sided the mood really is.
Questions
People also ask.
What is a normal bull/bear ratio?
Readings near 1.0 mean a balanced market, values above roughly 3.0 are usually described as crowded optimism and values below 1.0 as widespread pessimism.
Why do contrarians lean against the ratio?
Because prices already reflect what the crowd believes, so a very one-sided reading means there are fewer people left to buy and more who might be forced to sell.
Should a long-term investor act on it at all?
Rarely on its own, though it is a useful check on your own behaviour, because an urge to buy in a very high reading or sell in a very low one is often emotion rather than analysis.
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