Deck 10: Behavioral Finance and Technical Analysis

Question 1

A high ratio of specialist short sales compared to exchange short sales is interpreted as bearish.

Answer 1

True
Explanation: A high incidence of exchange short selling might be considered bullish because short sellers often overreact to the market and provide future demand potential to cover their short position. In the case of market specialists, this is not necessarily true. These sophisticated traders keep a book of limit and stop orders on their securities so they have a close feel for market activity at any given time, and their decisions are considered important. The normal ratio of specialist short sales to short sales on an exchange is about 45%. When the ratio goes up to 50% or more, market technicians interpret this as a bearish signal. A ratio under 40% is considered bullish.

Question 2

The Barron's Confidence Index is based on the premise that bond traders, being more sophisticated than stock traders, pick up trends more quickly.

Answer 2

True
Explanation: The theory is based on the premise that bond traders are more sophisticated than stock traders and pick up trends more quickly. The theory suggests that a person who can figure out what bond traders are doing today may be able to determine what stock market investors will be doing in the near future.

Question 3

Point and figure charts emphasize significant price changes and price reversals.

Answer 3

True

Question 4

The idea that stock prices tend to move in trends that persist for long periods, and that these trends can be detected in charts, are basic assumptions of fundamental analysis.

Question 5

When short sellers are bearish, it is thought to be a bullish signal.

Question 6

Barron's Confidence Index has only a mixed record of success.

Question 7

A support level signals new demand.

Question 8

Short-selling by market specialists provides future demand potential to cover their short position.

Question 9

Odd-lot traders traditionally are assumed to be strong sellers right before the bottom of a bear market, but this is not always the case.

Question 10

The short interest ratio is the total short sales position, divided by average daily exchange volume for the month.

Question 11

Odd-lot traders have never outguessed professional traders.

Question 12

The support level is the stock price that generates new demand, while the resistance level is the price at which investors begin to sell in order to take a profit.

Question 13

Mutual fund cash positions and trading by insiders are not generally reliable indicators of market health or activity.

Question 14

A high short interest ratio is considered bullish.

Question 15

Technical analysis assumes that many chart patterns tend to repeat themselves.

Question 16

Chartists do not consider volume significant in reading market indicators.

Question 17

Under normal circumstances, the Barron's Confidence Index is between 100 and 200.

Question 18

The Dow Theory puts emphasis on long-run trends.

Question 19

Divergence between advances and declines in a breadth of the market indicator and the Dow Jones Industrial Average may signal a reversing trend in the market.

Question 20

Investment advisory recommendations are part of the smart money rules.

Question 21

The essence of _______ is to determine whose judgment about the market is wrong.

A)key indicators
B)smart money rules
C)contrary opinion rules
D)None of the above

Question 22

The Dow Theory uses _________ to follow three major types of market movements.

A)charting
B)key indicators
C)fundamental analysis
D)None of the above

Question 23

According to the Dow Theory, daily fluctuations and secondary movements in the market are used to help identify:

A)a key indicator.
B)a primary trend.
C)shifts in demand and supply.
D)More than one of the above

Question 24

The Dow Theory maintains that there are three major fluctuations in the market: daily fluctuations, weekly fluctuations, and yearly fluctuations.

Question 25

A low Barron's Confidence Index means that:

A)investors prefer stocks to bonds.
B)the yield on bonds is greater than that on stock.
C)low-quality bonds have returns much higher than high-quality bonds.
D)low-quality bonds have returns slightly higher than high-quality bonds.

Question 26

The Barron's Confidence Index is used to observe the trading pattern of investors in the stock market.

Question 27

The problem in reading charts has always been:

A)with the errors that are frequently made in the graphing process.
B)understanding the past market movements.
C)in analyzing the patterns in such a fashion that they truly predict stock market movements before they unfold.
D)None of the above

Question 28

High mutual fund cash positions would represent withdrawal from the market and thus a possible future market decline.

Question 29

Chartists carefully read point and figure charts to observe market patterns (where there is support, resistance, breakouts, congestion, and so on).

Question 30

______________ analysis focuses on charts and graphs based on internal market data, while _____________ analysis emphasizes earnings reports, management capabilities, and new product development.

A)Technical; fundamental
B)Fundamental; technical
C)Technical; external
D)Technical; semi-strong

Question 31

All of the following are smart money rules except:

A)investment advisory recommendations.
B)short sales by specialists.
C)Barron's Confidence Index.
D)None of the above are exceptions

Question 32

Volume of short sales represents a contrary opinion rule, because:

A)short sellers generally do not know what they are doing.
B)short sellers tend to overreact.
C)short sales generate potential demand for stocks.
D)More than one of the above

Question 33

A breadth of the market indicator attempts to measure what a broad range of securities is doing as opposed to merely examining a market average.

Question 34

A bar chart is used to demonstrate:

A)advances and declines of stock prices.
B)high, low, and closing stock price on a daily basis.
C)changes of two points or more.
D)More than one of the above

Question 35

The breadth of the market indicator:

A)attempts to measure what a broad range of securities is doing as opposed to merely examining a market average.
B)can be used to analyze upturns in the market.
C)compares the advance-declines with the movement of a popular market average to determine if there is divergence between the two.
D)All of the above

Question 36

The essence of the contrary opinion rule is that it is easier to figure out who is right than who is wrong.

Question 37

As the ratio of specialist short sales to total short sales increases, technicians consider the market to be:

A)bullish.
B)bearish.
C)neutral.
D)in the second leg of a bull market.

Question 38

A point and figure chart is used to demonstrate:

A)advances and declines of stock prices.
B)high, low, and closing price on a daily basis.
C)changes of two points or more.
D)More than one of the above

Question 39

While the Dow Jones Industrial Average may be weighted toward large firms, a __________ indicator may be used to examine all stocks on an exchange.

A)Key
B)Contrary opinion
C)Breadth of the market
D)More than one of the above

Question 40

The ____________ suggests watching the small investor, who is right most of the time but misses key market turns, and then doing the opposite.

A)contrary opinion rule
B)odd-lot theory
C)greed index
D)None of the above

Question 41

Contrary opinion rules or approaches to the market include:

A)the odd-lot theory.
B)short sales positions by the public.
C)the mutual fund cash position.
D)A and B

Question 42

Smart money rules or approaches to the market include:

A)short sales by specialists.
B)the put-call ratio.
C)Investment Advisory recommendations.
D)the odd-lot theory.

Question 43

Technical analysis is based on all of the following assumptions except:

A)that market value is determined by the interaction of demand and supply.
B)that stocks with strong earnings gains will outperform the market.
C)the assumption that, though there are minor fluctuations in the market, stock prices tend to move in trends that persist for long periods of time.
D)that shifts in demand and supply can be detected sooner or later.
E)that reversals of trends are caused by shifts in demand and supply.

Question 44

Under the Dow Theory, all of the following represent trends in the market except:

A)daily fluctuations.
B)secondary movement.
C)primary trends.
D)linear trends.

Question 45

The higher the mutual fund cash position,

A)the more likely the market is to go down.
B)the more likely the market is to go up.
C)the more likely the market is to stay relatively unchanged.
D)the higher mutual fund redemptions will be in the future.

Question 46

A ratio of the total short sales positions on an exchange to average daily exchange volume for the month is normally

A)between 0-.5
B)between 1.0-2.0
C)between 2.0-3.0
D)over 3.0

Question 47

Smart Money Rules include:

A)Barron's Confidence Index.
B)short sales by individuals.
C)short sales by specialists.
D)Both A and C