Question

5. If the mutual fund cash payment were to increase close to 12 percent, would the technician consider this cash position bullish or bearish? Give two reasons why the technical analyst would feel this way.

Answer 1

According to the theory of Contrary Opinion, majority is generally wrong and it is better to go opposite of majority’s opinion. Technical Analysist use the Mutual Fund Cash Positions as one of the several indictor of majority’s opinion. Mutual Fund’s ratio of cash to total assets range from low of 4% to high of 11%.

Increase in mutual fund’s cash position close to 12% is significantly high, therefor technical analysist should consider it as bullish because:

1. Contrary-opinion technician believes that mutual funds are usually are wrong at peaks and troughs. High cash position indicated that mutual funds are bearish and market is at bottom, hence poised to rise.
2. High cash position ration shows the potential purchasing power of mutual funds. This large cash balance will eventual be invested in near future that will results into increased stock prices.

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