The ProShare “Bear to Bull” Buy Ratios
Short-Selling Indicators
The odd lot and public short selling ratios were the greatest predictors of bear market bottoms during the golden age of technical analysis, which lasted from 1960 to 1985. They were founded on the idea that stock prices bottom out when the majority of investors are bearish, expecting lower prices. High levels of short selling signaled these times. The 1962, 1966, 1970, and 1974 bear market bottoms were successfully predicted by these two short selling ratios, and there were no false signals in between. As a result, these were the main instruments used by market technicians during that time period to predict when a bear market would end.
Sadly, the introduction of index futures and arbitrage short selling in the middle of the 1980s rendered these short selling indicators meaningless. Nowadays, very few market technicians are familiar with this significant history, but those who lived through the 1970s are.
ETFs for bear markets
With the introduction of bearish ETFs, this situation altered in 2007. These funds enabled the measurement of investor “short selling” once more. Investors weren’t shorting securities directly in this case; instead, they were purchasing ETFs that were.
ProShares was the fund family picked for the investigation. There are 135 funds in the ProShares family, with $67 billion under management. ProShares makes all of the information about their funds available every day, and the size of this family as a whole contributes to the statistical validity of the findings. For our purposes, 41 ETFs are categorized as bear market funds and 60 are bull market funds
The ProShare “bear to bull” buy ratios
We calculate two “bear to bull” ratios using ProShare funds. The first is simply called the “bear to bull” buy ratio.
Every day we calculate how much money is going into all the bear funds and all the bull funds. We average both over the preceding seven days to smooth out the results. We then divide the amount of money going into the bear funds by the bull funds. This gives us an idea of how much interest investors have could be either long or short the market. We then graph this number on the SK ranking scale to show when the ratio reaches historic extreme readings.
The second ratio applies the same procedure, but we only use the ultra pro bull and bear funds, which are the highly leveraged funds. These are the most heavily traded funds at ProShare and we feel focusing on them with one indicator provides insight into a certain type of short-term trader. This second ratio is called the “Ultra Pro bear to bull” buy ratio.
