There’s no denying that investing rewards the methodical, whether you consider it an art or a science.
For winners, it’s not the amount of information you have that brings success for you; it’s how you use it.
One of the best sources of information to tap is market sentiment. Here’s how you can evaluate it and
make the most out of your investments.
A Refresher Course on the Bulls and the Bears
Market sentiment is often based on the opinions of investors towards a particular security. When most
stakeholders in a market predict that the value of shares is going up, then it’s a bullish market. When
investors predominantly think the value of shares will decline, the market is said to be bearish. What
makes these opinions valid is that they come from investors who have done their research and made a
Bull markets usually signal a strong or strengthening economy with low unemployment rates. The
opposite goes with bear markets. They’re often a sign of a slowing economy where unemployment is
high and productivity is slow.
Understanding Market Sentiment Indicators
With just the basic definitions of a bull and bear market, it’s easy to buy in a bull market and sell out in a
bear market. But a smart investor anticipates the exact time a market will turn around to maximize
profits and minimize losses.
Invest in a bull market too late, and you’d have limited profitability and may get buyer’s remorse when
you see your shares plummet. Sell too late in a bear market, and you’ll be biting your knee seeing the
price of shares rise in the coming weeks. To make smart investments, you need to look at the bigger
picture by following indicators like the Bull/Bear Ratio and the VIX.
The Bull/Bear Ratio at a Glance
Investor Intelligence’s Bull/Bear Ratio is an indicator that measures how confident the top 100
investment advisors are about the market. When using this indicator, you shouldn’t solely base your
decision on a week’s result. It would help if you looked at a chart that shows every result published until
the current week. The main strategy is to look for extremes. If you see the trend reaching about 60%
bullish or bearish, then it’s likely to reverse.
The smartest investors look at different sources of information when it comes to making crucial
decisions. Though the Bull/Bear Ratio produces reliable data, you should also look at breadth indicators
like the Chicago Board of Options Exchange’s volatility indicator (VIX). Breadth indicators measure the
amount of trader participation in the market. The VIX measures the anxiety of traders about the S&P
- The higher the value, the more uncertain they are about the market.
Using Both Indicators
When you see the Bull/Bear Ratio reaching an extreme point, check the VIX to see if the market is stable
or reaching a volatile state. If the VIX level is climbing up, pull the trigger on your purchase or sale.
Remember that while evaluating market sentiments isn’t an exact science, it can still be a worthy
strategy to make the best trading decisions by.