- Bid:offer ratios are a marker of market sentiment as well as being correlated with future price movements
- Liv-ex bid:offer ratios have risen over recent months, perhaps indicating a change in the demand:supply balance
- Using statistical analysis, what might current bid:offer ratios indicate for the future?
Why do we look at bid:offer ratios?
The bid:offer ratio of a given wine or index serves not only as an indicator of market confidence but is also correlated with future price movements. If a bid:offer ratio rises to a certain level, prices are very likely to follow suit. Intuitively, where there is sufficient demand, sellers are not forced to bring their offer prices down, thus stabilising future prices. When the bid:offer ratio falls, stockholders are losing power, and prices will eventually be forced down.
Considering the Liv-ex 100 below, we can see that the bid:offer ratio dropped more than six months before the turn of the market. At the time, prices and headlines were still driving buyers towards the market – there was little indication that a drop was imminent. Careful attention to the bid:offer ratio, however, would have warned market participants to exercise more caution, and to consider exiting their positions.
This month, the Liv-ex 100’s bid:offer ratio has risen to 0.70, the highest reading since April 2023, when the ratio was still on its way down.
What does this mean for the index?
Recently, Liv-ex data analyst Alexander Chisholm conducted a statistically rigorous analysis of the relationship between indices and their corresponding bid:offer ratio. The model calculates, for each index, the exact bid:offer ratio that predicts future stability. For those looking to capitalise on this down market at the right time, bid:offer ratios will be of paramount importance.
For the Liv-ex 100, the strongest relationship exists between the ratio and the change in the index after two months. A ratio of 1.0 predicts future stability, while a ratio above 1.0 predicts a rise over the ensuing two months. Following its current reading of 0.7, the model predicts a 0.6% decline – minimal relative to its movement over the past three years – over the next two months.
How about other indices?
The Liv-ex 100 is not the only index to have seen its bid:offer ratio improve substantially in recent months. While most current readings predict further declines, they are minimal. The Champagne 50’s ratio of 0.51 indicates stability over the next three months.
