CFA Practice Question

CFA Practice Question

Which of the following events would a technical analyst interpret as bearish?
A. a low rate of odd-lot short sales as a percentage of total odd-lot sales
B. decline in credit balances
C. a low mutual fund cash position
Explanation: Credit balances result when investors sell stocks and leave the proceeds with their brokers, expecting to reinvest them shortly. Technicians view a decline of credit balances as a decrease in buying power and a bearish sign.

User Contributed Comments 13

User Comment
robkaz I believe "a low mutual fund cash position" is also considered bearish because institutions have less buying power.
kevin Here's what's in the text and notes:

Mutual funds hold some part of their portfolio in cash. The cash ratios or liquid asset ratios (ratios of cash as a percentage of the total assets in mutual funds' portfolio) are usually from 5 - 13 percent. High percentage of cash means bearish, and vice versa. Contrary-opinion technicians consider the mutual funds as a good proxy for the institutional investor, and they believe that mutual funds usually are wrong at peaks and troughs. A high mutual fund cash position also can be considered as a bullish indicator because of potential buying power since technicians believe that these cash funds will eventually be invested and will cause stock prices to increase, and vice versa. Therefore, technicians would tend to buy when the cash ratio approaches 13 percent and to sell when the cash ratio approaches 5 percent.

Therefore, C is not clear.
Ebenezer In simple terms, low cash position means nearly fully invested. If bearish conditions exist, there will be high cash position as mutual funds will wait and see.
timspear So if investors don't have much left to invest it's bearish, if fund investors don't have much left to invest it isn't! Reminds me of Buffet saying the function of market forecasters is to make astrologers look good.
Will1868 CFA Institute should just ban Tech. analysis - it's all hogwash!
stefdunk though, technical analysts who adhere to the odd-lot theory would consider option A bearish
hubmens Dont agree with B. Credit balance is brokerage accounts mean uninvested cash. Falling credit balances mean 'normal' investors are bullish. A technical view of a build-up in credit balances would be that there is an increase in potential future buying power in the market, which is considered bullish. as per Schwezer notes.
hubmens Sorry folks: B appears correct based on my above statement (last sentence). Guess I was a bit confused.
pepper a simple way to look at this. When an investor or mutual holds more cash, its because they are fearful that the market might fall. for individual, its a run for safety, for mutual fund, it is a case of no investment opportunity now + the need to meet redemption when market fall (redemption always picks up in down market)
djread Intuitively, when there is uncertainty, there is usually a flight to cash (liquidity). So, I took C to mean that MF's were fully invested and thus a bullish sign
darin3200 How are B and C not the same? Less cash to buy with is bearish.
farhan92 lol C is not correct (even though thats what i chose). If you were to invest in a fund and they just leave the money laying around (large cash position) you wouldn't be too happy. Therefore, in good times funds will be tied up in securities and in bad times there will be a large cash position (funds wouldn't invest as much).
pigletin no need to discuss this question, it's all about rules just remember it
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