Which of the following represents a "contrary opinion" technical indicator?
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A. B. C. D. E. F.A
Of the choices listed, only "mutual fund cash positions" represents a contrarian technical indicator. Technical analysts often believe that the majority of market participants are incorrect in their opinions about market direction and valuation, especially during periods preceding market peaks and troughs. This style of thinking is often referred to as "contrary opinion" technical analysis.
The mutual fund cash position is a contrary opinion technical indicator because contrarian technical analysts believe that mutual funds will be wrong in their forecasts of market direction. Technical analysts often use mutual funds as a proxy for institutional investors, and believe that the mutual fund cash position provides important insight into the sentiment of institutional investors. Specifically, these technical analysts believe that a high mutual fund cash position, which indicates that mutual funds are bearish on the market, is actually a signal of an impending upward move in stock prices. Conversely, a low mutual fund cash position is viewed as bearish by contrarian technical analysts. The intuition behind this opinion is relatively straightforward - a low mutual fund cash position indicates a low amount of buying power within mutual funds, i.e. there is less money available to support stock prices.
Several studies have examined the cash ratio's ability to predict market cycles and have determined its usefulness is less than that implied by the technical analyst community.
The Confidence Index is a measure of yield spreads between high-grade corporate bonds and the yields on average corporate bonds. The Diffusion Index measures the breadth of the market, and is found by taking the total volume of advancing shares plus one-half of the issues unchanged, divided by the total number of issues traded. The ratio of short sales by specialists is used by technical analysts to track the opinions of the "smart money," and the yield spread between T-Bills and Eurodollars is used to measureinternational sentiment and confidence. The T-Bill-Eurodollar Yield Spread is another example of a "smart money" technical indicator.