Contrary-Opinion Rules

Contrary-Opinion Rules - Contrary-Opinion Rules • • •...

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Unformatted text preview: Contrary-Opinion Rules • • • Many analysts rely on rules developed from the premise that the majority of investors are wrong as the market approaches peaks and troughs Technicians try to determine whether investors are strongly bullish or bearish and then trade in the opposite direction These positions have various indicators 15-1 Contrary-Opinion Rules • Mutual fund cash positions – – • Assumes that mutual fund managers are poor judges of market turning points Credit balances in brokerage accounts – • Buy when the mutual fund cash position is high, sell when low Buy when credit balances increase, sell when credit balances fall Investment advisory opinions 15-2 Contrary-Opinion Rules • OTC versus NYSE volume – • Chicago Board Options Exchange (CBOE) put/call ratio – • If OTC volume increases relative to NYSE volume, sell since speculation increases at peaks Buy when option purchasers are bearish (when the put/call ratio increases) Futures traders bullish on stock index 15-3 Follow the Smart Money • • While contrary-opinion rules assume that most investors are not smart, these indicators seek to follow the path of sophisticated, and assumed smart, investors The Barron’s Confidence Index – Measures the yield spread between highgrade bonds and a large cross section of bonds 15-4 Follow the Smart Money • T-Bill - Eurodollar yield spread – • Decreases in this spread indicates greater confidence, and is a bullish indicator Debit balances in brokerage accounts – – Such balances represent buying on margin, which is assumed to be done by largely sophisticated investors Increases are a bullish signal 15-5 Momentum Indicators • Breadth of market – – – • Measures the number of issues increased and the number of issues declined each day The advance–decline index is typically a cumulative index of net advances or net declines See Exhibit 15.5 Stocks above their 200-day moving average – 15-6 The market is considered to be overbought Exhibit 15.5 15-7 ...
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Contrary-Opinion Rules - Contrary-Opinion Rules • • •...

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