What it is:
How it works (Example):
Each week, survey data is gathered from investors and investment professionals to determine who is bullish (optimistic) and who is bearish (pessimistic) about the market climate. The bull/bear ratio is calculated by dividing the number of bullish respondents by the number of bearish respondents.
The ratio is a contrarian indicator, interpreted as follows: a high bull/bear ratio (greater than 1) indicates that there are too many bulls in the market, and you should take a bearish stance; a low bull/bear ratio (less than 1) indicates that there are too many bears in the market, and you should take a bullish stance.
To illustrate, suppose Investors Intelligence surveys 100 investors and investment professionals in a given week. Of these 100 respondents, 18 are bullish and 82 are bearish. The ratio is calculated as follows:
18 bulls/82 bears = 0.22
Since the ratio is a contrarian indicator, this low bull/bear ratio predicts a bullish future for the markets.
To illustrate in the other direction, suppose Investors Intelligence surveys another 100 people the next week. Of these 100, 70 respond as bullish and 30 respond as bearish. The calculation would be:
70 bulls/30 bears = 2.33
Again, reading the ratio as a contrarian indicator, this high bull/bear ratio would predict a bearish future.
Why it Matters:
The bull/bear ratio is a real quantitative measure based on the feelings of actual people working in the market and/or with a stake in the market. The bull/bear ratio measures how people feel "right now" (i.e. at the time of the survey). By the time Investors Intelligence publishes the ratio, these same peoples' feelings regarding the future of the market could have changed.
It is the "present" nature of this data that accounts for the contrarian interpretation of the consequent bull/bear ratio. This is because high optimism about current market conditions (high ratio -- greater than 1.0) indicates that the market is probably going to top-off and begin to go down. On the other hand, high pessimism about current conditions (low ratio -- less than 1.0) indicates that the market is probably going to bottom-out and begin an upward trend. Such information could influence potential investors in the market.