Contrary-Opinion Rules for Technical Analysis | CFA Level 1 Exam Prep

Contrary-Opinion Rules for Technical Analysis

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Question

Technical analysts using contrary-opinion rules would consider

Answers

A. a low cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively low proportion of their portfolios into cash, this is usually indicative of bullish sentiment among the mutual fund managers. Technical analysts believe that the managers are wrong, and that there will be a market peak.

B. a low cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively low proportion of their portfolios into cash, this is usually indicative of a bearish sentiment among the mutual fund managers.

C. a high cash position by mutual funds to be indicative of an upcoming market peak. When mutual funds invest a relatively high portion of their portfolios into cash, this is usually indicative of a bearish sentiment among the mutual fund managers.

D. a high cash position by mutual funds to be indicative of a continuing bear market. When mutual funds invest a relatively high portion of their portfolios into cash, this is usually indicative of a bullish sentiment among the mutual fund managers. Technical analysts believe that the managers are wrong, and that there will be a continuing bear market.

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Explanations

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A. B. C. D.

Contrary-opinion rules hold that the majority of investors (including mutual fund managers) are wrong as the market approached peaks or troughs. When mutual funds have a low cash position (7%, for example), technical analysts would take this as a sign that mutual fund managers are too bullish about the market, and that it will instead soon reach a peak, and fall after that.

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