Investment Advisory Opinions

Investment advisory opinions indicate whether investment advisors are bullish or bearish about the future of stock prices. Technical analysts who follow the predictions of investment advisors take a contrarian (opposite) view. When most of the advisors are bullish, technical analysts become bearish. Similarly, if the majority of advisors become bearish, technical analysts see it as is a signal to buy.

It is strange to think that investment advisors who spend most of their working hours studying the market should be given equal weight with the “odd-lotters,” who are considered to be unsophisticated investors, in their assessments of the market. However, the investing public may never be sure about the underlying reasons for recommendations from stock analysts’ and investment advisors because they might have conflicts of interest in recommending stocks to buy and sell.

Mutual Fund Cash Position

Mutual fund cash position in relation to the amount of total investments is used as an indicator of the direction of the markets. The amount of cash a mutual fund has in relation to the amount of its total investments is an indicator of the direction of the markets. By monitoring the cash positions of mutual funds, technical analysts can assess the potential purchasing power of mutual funds. Equity mutual funds hold between 5 and 25 percent of their assets in cash. When mutual funds are fully invested or hold little of their assets in cash, they have little purchasing power in the markets. However, when the funds hold larger percentages of their assets in cash (15 percent or higher), their potential purchasing power in the market is significant, which could trigger an upturn in the market when the cash is invested.

Relative Strength Ratio

The relative strength ratio is the price of a stock compared with another stock, index, or the market. The relative strength ratio allows you to compare the performance of one stock or market index relative to another. For example, to compare the performance of Coca- Cola Company with the performance of PepsiCo and determine which is the better performer, you construct the ratio of relative strength. The chart is constructed by plotting daily stock prices for a specified period. What matters in determining the relative strength is that the original investment is the same for both stocks. The process is illustrated in Table 11-3.

The relative strength shows the appreciation or depreciation of stock X to stock Y with an initial investment of $75 in each stock on the first Monday. In the first week, stock X declined relative to stock Y, but this situation reversed in the second week, where stock X appreciated more than stock Y.

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