In some cases the psychology of consumers can become so extreme, that the definition of what is speculative expands greatly. As a result, using contrarian investing in conjunction with other indicators / tools can help prudent investors and traders, be able to identify when the market condition are becoming more extreme.
Contrarian Indicators and Tools
When using the different contrarian indicators / tools in conjunction with one another, you can begin to see how this strategy can be used, to effectively determine if the market conditions are overbought or oversold. There are number of different tools that can be utilized to indentify major changes that are occurring in the trend of a stock or the market averages. These would include: headlines within the mainstream press, the different put / call ratios, ISEE sentiment indicators, the VIX, the VXN, investor intelligence surveys, short interest and correlation with what is being seen with the industry or the major market averages around world.
Headlines
When looking at the first tool that can be used, the headlines within the mainstream press, it is clear that this can provide a reading as to the overall mood of the investing public. Where, the press will report on those issues / situations that are important to the public, as they will talk about the various views on what is taking place. To illustrate the greatest amount of emotions, a snappy headline will appear to convey this feeling. If this happens consistently enough, many contrarians will use this as one of the tools to confirm if the investing public is to pessimistic or optimistic. An example of this can be seen during the summer of 1982, when many analysts and economists were predicting that the Dow Jones Industrial Average was going to 500, while the economy was heading into a major economic depression. Where, many headlines from across the country would say, "IMF seeks to calm jittery bankers. Mortgage delinquencies hit the highest level since 1965. De Deers reports worst the period since the 1930s."
What this shows, is that all of these different headlines that were seen during the summer of 1982 would indicate a major reversal that was getting ready to occur. Where, the markets would identify a major change that was taking place in the trends of the major market averages around the world. An example of when the markets have become overvalued; can be seen during the summer of 1987 with the common headlines saying, "Chrysler reports best quarter ever. Stampede for stocks becomes a scramble. The bulls are coming."
What this shows is that the headlines during the summer of 1987; would highlight the overall atmosphere of greed that was encompassing the markets. As a result, it would only be a matter of time until a major reversal would take place. Where, both examples illustrate how using the headlines from the popular press can be one way of indentifying the overall mood of investors and the general public. This is one of the first steps to knowing if the markets are overbought or oversold.
The Put Call Ratios
The put call ratio is when you are looking at the total amount of open puts to open calls that are trading on the Chicago Board of Options Exchange (CBOE). To fully understand how the put call ratio works requires examining the purpose of options. Simply put, an option is a contract that is giving the owner of a specific stock or security the right to buy or short, a particular investment at a particular price. A put is when an investor will purchase an option that requires the value of the underlying investment to decline. The way it works is the investor who purchases a put, has the option of shorting the stock at a particular price. If the price of the stock declines beyond the price that owner agreed to when purchasing the option (the strike price), then the option has seen an increase in value. While, a call is when an investor will purchase an option that requires the value of the investment to increase. Like with a put option, if the value goes beyond the strike price, then the call will see a significant appreciation in value.
However, if the option does not move beyond the strike price by the time it expires, then it is worthless. The risk that the investor faces...
investment management in the financial sector. The paper highlights the world's present macroeconomic situation. It further details the macro economic situation and the way it affects investment decisions in several investors. In addition, the paper describes a sample investment programme and provides critical decisions to investors as well as investment vehicles used by the investment moguls. The paper summarises practical exercises in compound investment management growth and the use
Mergers and Acquisitions: The Case of Microsoft and EPAM This paper focuses on Microsoft Corporation. The firm is one of the major public multinational corporations in America with headquarters in Redmond, USA. The company majors in developing, manufacturing, licensing, and supporting a broad scope of services and products that are especially predominant in the computing of various product divisions. The firm was established in 1975 with the goal of developing and
Behavioral Finance and Human Interaction a Study of the Decision-Making Processes Impacting Financial Markets Understanding the Stock Market Contrasting Financial Theories Flaws of the Efficient Market Hypothesis Financial Bubbles and Chaos The stock market's dominant theory, the efficient market hypothesis (EMH) has been greatly criticized recently for its failure to account for human errors, heuristic bias, use of misinformation, psychological tendencies, in determining future expected performance and obtainable profits. Existing evidence indicates that past confidence in the
Manufacturing Seven Key Elements for Successful Implementation Norman Binette, Jr. Biddeford, Maine Manufacturing organizations are built on the premise that they possess the ability to provide a wide variety of quality products for their customers. This reputation is dependent upon the constant review of existing processes and the identification of new and innovative methods of production that will enhance and increase the diversification of product lines. One such process that has proven itself
(Livingston 2012) What are the positive aspects of this theory -explain how markets behave? Why? The positive aspects of this theory are that it identifies changes in the markets early. This helps investors to be able to purchase stocks when everyone has become overly pessimistic (leading to a massive selloff). At the same time, this theory helps to determine when the underlying trends could be changing (with investors becoming overly optimistic).
Brand equity of trusted advisor for CRM application delivery. Source: Framework based on the concepts presented in (Yoo, Donthu, Lee, 2000) References Aaker, D.A. (2012). Win the brand relevance battle and then build competitor barriers. California Management Review, 54(2), 43-57. Aremu, M.A., & Bamiduro, J.A. (2012). Marketing mix practice as a determinant of entrepreneurial business performance. International Journal of Business and Management, 7(1), 205-213. Friedman, H.H., & Friedman, L.W. (1987). Marketing methods for software.
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now