Public Short Ratio

Overview

The Public Short Ratio (PSR) is a market sentiment indicator that shows the relationship between the number of public short sales and the total number of short sales. The assumption is that the public are poor traders; hence going counter to their positions can create profitable opportunities. The PSR is calculated by dividing the volume of weekly short sales made by institutions and stock exchange members and those made by the public or retail.

Understanding the PSR

The Public Short Ratio is displayed as a line. As the value of the PSR increases, it is displaying the public's bearish sentiment towards the stock market. In order to make observations about the indicator, traders use a 10-week moving average of the closing price of the PSR. When the 10-week moving average of the PSR is above 25%, the public is bearish. Conversely, a PSR moving average value under 25%, the public is bullish.

Like many indicators, if the PSR moving average value stays above or below the 25% ratio for an extended period, the primary trend has legs. When a market begins to rally after an extended bear market, the PSR will stay above 25%, as the public shorts the strength. This is why the market will grind higher as it transitions from a bear to a bull market. Professional traders believe that the true sign of a strong bull market is an extremely high Public Short Ratio reading. While the PSR is a simple indicator to observe, many novice traders do not have access to the trading platforms that publish the indicator.

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