Contrarian View on Credit Balances in Brokerage Accounts

Explanation

Credit balances with brokerages result when investors sell their stock holdings and leave the cash balances with their brokers, expecting to reinvest them shortly.

Technical analysts view these balances as pools of potential purchasing power overhanging the market and hence believe that the market is bullish. Contrarians, on the other hand, believe that most market participants make wrong investment decisions as the market approaches the peak or trough in a cycle. Hence, contrarians consider a large increase in credit balances as a bearish signal.