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Contrarian Opinion Rules

June 11, 2012
  • Cash position of mutual funds
  • Investor credit balances in brokerage accounts
  • Opinions of investment advisory service
  • OTC vs NYSE volume
  • CBOE put/call ratios
  • Stock index futures

Contrarians do the opposite of the heard, ie consensus opinion, so when mutual funds are overweight cash, contrarians believe it is a good time to invest. When investors have lots of unused credit in their brokerage accounts, contrarians are bullish. When all the investment advisory services are recommending selling a stock, contrarians buy. Contrarians analyze volume to determine when retail investors are getting out of the market, they also consider that a buy signal. CBOE is the Chicago Board of Exchange, if puts greatly outnumber calls, consensus is prices are going down, thus the increase in purchasing downside protection, contrarians of course are then bullish. The logic behind the last one is, if stock index futures indicate that market is heading down, contrarians again see this as a buying opportunity.

I’m sure the rules are actually much more complicated and involve trying to time the market not just always buy when others sell, but for CFA Level 1 you only need the gist of contrarian opinion rules.


From → Quant

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