A strategist argues that a rally was driven by herding rather than by better fundamentals. Which evidence best supports her view?
Show the answer and explanation
Answer: C. Prices rose on heavy buying while earnings forecasts stayed the same
Herding means prices move because investors follow each other, not because the value of the company has changed. The best evidence is heavy buying with no change in fundamentals, such as earnings forecasts. If forecasts were rising, the rally could be explained by better prospects. Falling volume would not suggest a crowd. For example, a stock that rises 30% on heavy buying while analysts' earnings forecasts stay flat looks like herding.
Why the other options are wrong:
A. Earnings forecasts were revised up as prices rose - This points to fundamentals driving the price rise, which is the opposite of herding.
B. Trading volume fell while prices rose - Herding is shown by heavy trading in one direction. Falling volume does not suggest a crowd rushing in.