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:
- Advisors Sentiment Bullish (Mnemonic: USIIBUL): The percentage of advisors who are bullish on economic sentiment.
- Advisors Sentiment Bearish (Mnemonic: USIIBER): The percentage of advisors who are bearish on economic sentiment.
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
- Product Insight: When plotting two series onto a chart which have different units, users can move a line to another axis. In this example, users can click on the grey line and under settings, move it to the right-hand axis.
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
- Product Insight: To overlay a recession band, go to ‘Annotations and Forecasts’ and add a band. Users can also add political bands for U.S. and U.K. which are helpful during elections.
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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