by Tajinder Dhillon.
In this ‘Product Insight’, we look at how users can create a sentiment indicator that acts as a ‘contrarian’ signal for U.S. equities.
Refinitiv Datastream is a financial database with over 35 million individual instruments or indicators across all major asset classes, with up to 120 years of data, across 175 countries.
Using data from Investors Intelligence, we highlight two data series to create our indicator:
Dividing bullish sentiment by bearish sentiment, we create our own ‘Bull/Bear’ sentiment indicator. To create this in a Datastream chart, enter “USIIBUL/USIIBER” in Line 1 of the charting tool.
Exhibit 1 highlights the ‘Bull/Bear’ ratio in blue along with the S&P 500 in grey. This indicator has provided an effective contrarian ‘timing’ signal during the last year.
Exhibit 1: Bull/Bear Ratio vs. S&P 500
When the ‘Bull/Bear’ ratio drops below one, it appears to generate a signal that we have likely seen a ‘bottom’ in the S&P 500.
The ratio has risen for the sixth consecutive week from a low of 0.6x in mid-June (lowest reading since March 2009) to a current reading of 1.6x (the highest reading since mid-January), indicating greater bullish economic sentiment from surveyed participants.
Looking over the last 15 years, the ‘Bull/Bear’ ratio has dropped below one approximately eight times (2008, 2010, 2011, 2015, 2016, 2019, 2020, and 2022) as shown in Exhibit 2.
The signal appears to be effective during all these instances, especially in 2019 and 2020 where the indicator did a good job in calling a ‘bottom’.
Exhibit 2: Bull/Bear Ratio vs. S&P 500
In a time of great market uncertainty, users may find this indicator a valuable addition to the toolkit as one data point or one signal is not enough to parse through the unique environment that we face today.
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