Hey everyone, I’m stuck at work and want to know the answer to this. Which of the following statements about technical analysis is correct? a-When investors credit balances are falling, contrary-opinion technicians are bearish. b-when margin balances in brokerage accounts increase, contrary-opinion technicians are bearish. c-When the yield spread on high-quality bonds narrows, the confidence index decrease and smart-money techs become bullish d-A tech analyst supports the weak form of the efficient market hypothesis. I think its B, but can some explain why the others are wrong?
dlkillabee, I think the answer should be ‘A’, here are my reasons… A- When investors credit balances are falling, contrary-opinion technicians are bearish. Exp- When the Credit-Balances are going down, means investors are investing, indicating bullish market, so contrarians will be bearish. B-When margin balances in brokerage accounts increase, contrary-opinion technicians are bearish. Exp- When Margin-Balances increases, investors are saving money, and are not investing, i.e. indicating bearish market, so the contrarians will be bullish (if at all they look at this indicator) C-When the yield spread on high-quality bonds narrows, the confidence index decrease and smart-money techs become bullish. Exp- Yield-spread narrows when people are uncertain about the future movement of the market and hence buy quality bonds as opposed to low-grade-bonds, so confidence (C.I.) is low and the smart-money technicians are bearish. D-A tech analyst supports the weak form of the efficient market hypothesis. Exp-They hate the EMH theory, especially its weak-form. - Dinesh S
Thanks for getting back to me. I guess I’m confused on what they mean by credit balance and margin balances. I work at a broker/dealer using margin accounts. And on margin accounts, the margin balances raises for more equites you buy. So buying would be bullish and techs would do the opposite. I may be looking at this wrong.
dlkillabee, How I thought about it was this… Credit Balance (Credit left to spent) = Credit Limit (as per the credit union) – Money already used up on Credit. So, Credit Balance is low means money used up is high, people are buying, Bullish Credit Balance is high means money not used up; people are not buying, Bearish I might be wrong too … I develop softwares for a living!! - Dinesh S
Nice, The example would hold true with margin balances too. I’ll find out and repost later when i get home. Thanks Dinesh.
I think “b” is the answer. true that credit balances falling indicate buying by investors but it is not a agressive buying as when margin balances are rising. Dreary
This question got me a few days ago while I was working through the qbank questions. While it looks like both A and B are correct options, margin balances is not a contrary-opinion rule indicator, it is a “smart money” indicator. A is the only correct answer. The way I remember this question now is: Credit balances measure the trading activity for all traders, not just a specific group. (read: herd investing) The margin balances indicator is only for those supposed smart traders who trade on margin - hence a smart money indicator. Hope this helps.
WOW, this question SUCKS a huge one. Looks like the answer is A.
Good point cully, but do you know where it was mentioned that margin balances is not a contrary-opinion rule indicator, it is a “smart money” indicator? Dreary
2007 CFAI Text, Volume 5 (Equity and Fixed Income), page 335 has it listed as a smart money indicator, considering its under the “Follow the Smart Money” subheading that begins on page 333 and ends on page 335. The contrary opinion rules are on pages 331 and 332 and margin balances are not mentioned as a contrary opinion rule here.
just a thought… i would think D is also feasible? Dont tech analysts support the weak-form EMH that there is information in past trading prices???
Bluey 1.8T Wrote: ------------------------------------------------------- > just a thought… > > i would think D is also feasible? > > Dont tech analysts support the weak-form EMH that > there is information in past trading prices??? An excerpt from wiki… Weak-form efficiency -------------------------- 1. No excess returns can be earned by using investment strategies based on historical share prices or other financial data. 2. Weak-form efficiency implies that Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. - Dinesh S
Tech analysts do not support the weak form. They don’t think it holds; otherwise, they would be out of business. Dreary