Contrary opinion

Right in the continuation of Dow’s theory, Neil (1954) developed the “contrary opinion” principle.

This system lies on the idea that, whenever all investors have the same opinion at the same moment, it is very unlikely that this opinion will materialize in facts… This is due to the fact that, if everybody is bullish, who is left to buy?



This approach can appear extremely systematic and hazardous but it still stands in the logical continuation of Dow.

Indeed, in the theory of this latter, the second period corresponds to a phase of growing confidence in the stock, associated with its acquisition by a growing number of investors. Thus, at the beginning of the third phase, all investors, which are bullish on the stock, have already bought it, while the first “aggressive buyers” are selling. We can then wonder, who will be the buyers enabling the stock to go on with its rise! The market would even have a tendency to fall as the first investors get rid of their shares…

So as to estimate sensitive levels, investors use mostly opinion polls related to professionals’ confidence: a very high confidence level is likely to indicate an overbought situation, announcing a reversing on the downside. A symmetric situation could of course be handled on the downside.