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Why it Matters:
Fundamental analysis, like technical analysis, attempts to predict which stocks are valuable and
which are not. According to its proponents, fundamental analysis offers a fuller picture of the
possible movements of both the stock market and individual stocks because as many elements as
possible are investigated. Technical analysis, on the other hand, only looks at past data of stock
prices. Perhaps the greatest argument in favor of fundam
issuer, like potential changes in credit ratings. For evaluating stocks, this method involves the use
of revenues, future growth, earnings, return on equity, profit margins and other data for
determining the underlying value and possibility for future growth.
EIC
Economic
Industry
company
ECONOMIC ANALYSIS:Economic analysis aims at determining if the economic climate is conductive and is capable of
encouraging the growth of business sector, especially the capital market. When the company
expands, most industry groups and companies are expected to benefit and grow. When the
company declines most sectors and companies usually face survival problems. Companies are a
part of the industrial and business sector, which in turn is a part of the overall economy. In the
Indian economy, the first places are considered are the behavior of monsoon and the performance
of agriculture. Secondly, India has a mixed economy, where the public sector plays a vital role.
TOOLS FOR ECONOMIC ANALYSIS: The most used tools for economic analysis are:
1. Gross domestic product
2. Monetary policy and liquidity
3. Inflation
4. Interest rates
5. International influence
6. Consumer sentiment
7. Fiscal policy
8. Influences on long term expectations
INDUSTRY ANALYSIS:An industry is a group of firms that have similar technologcial structure of production and
produce similar products.
FACTORS TO BE CONSIDERED:
1.
2.
Labor:
The analysis of labor industry scenario in a particular industry is of great importance. The
number of trade unions and their operating mode have impact on the labor productivity and
modernization of the industry.
3.
4.
Pollution standards:
Pollution standards are very high and strict in the industrial sector.
COMPANY ANALYSIS:In the company analysis the investor assimilates the several bits of information related to the
company and evaluates the present and future values of the stock. The risk and return associated
with the purchase of the stock is analyzed to take better investment decisions. The valuation
process depends upon the investors ability to elicit information from the relationship and interrelationship among the company related variables.
The present and future values are affected by a number of factors(i.e)
Competitive edge
Earnings
Capital structure
Management
Financial performance
TECHNICAL ANALYSIS
What is Technical Analysis?
Technical Analysis is the forecasting of future financial price movements based on an
examination of past price movements. Like weather forecasting, technical analysis does not
result in absolute predictions about the future. Instead, technical analysis can help investors
anticipate what is likely to happen to prices over time. Technical analysis uses a wide variety
of charts that show price over time
The Basis of Technical Analysis
At the turn of the century, the Dow Theory laid the foundations for what was later to become
modern technical analysis. Dow Theory was not presented as one complete amalgamation, but
rather pieced together from the writings of Charles Dow over several years. Of the many
theorems put forth by Dow, three stand out:
the information captured by the price to interpret what the market is saying with the purpose of
forming a view on the future.
2.
Broad market analysis through the major indices such as the S&P 500, Dow Industrials,
Individual stock analysis to identify the strongest and weakest stocks within select
groups.
Chart Analysis
Technical analysis can be as complex or as simple as you want it. The example below represents
a simplified version. Since we are interested in buying stocks, the focus will be on spotting
bullish situations.
Overall Trend: The first step is to identify the overall trend. This can be accomplished with
trend lines,moving averages or peak/trough analysis. As long as the price remains above its
uptrend linezxZxZXResistance: Areas of congestion and previous highs above the current price
mark the resistance levels. A break above resistance would be considered bullish.
Buying/Selling Pressure: For stocks and indices with volume figures available, an indicator
that uses volume is used to measure buying or selling pressure. When Chaikin Money Flow is
above zero, buying pressure is dominant. Selling pressure is dominant when it is below zero.
Relative Strength: The price relative is a line formed by dividing the security by a
benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The plot of
this line over a period of time will tell us if the stock is outperforming (rising) or under
performing (falling) the major index.
The final step is to synthesize the above analysis to ascertain the following:
Support/Resistance
Simple chart analysis can help identify support and resistance levels. These are usually marked
by periods of congestion (trading range) where the prices move within a confined range for an
extended period, telling us that the forces of supply and demand are deadlocked. When prices
move out of the trading range, it signals that either supply or demand has started to get the upper
hand. If prices move above the upper band of the trading range, then demand is winning. If
prices move below the lower band, then supply is winning.
Open to Interpretation
Furthering the bias argument is the fact that technical analysis is open to interpretation. Even
though there are standards, many times two technicians will look at the same chart and paint two
different scenarios or see different patterns. Both will be able to come up with logical support
and resistance levels as well as key breaks to justify their position. While this can be frustrating,
it should be pointed out that technical analysis is more like an art than a science, somewhat like
economics. Is the cup half-empty or half-full? It is in the eye of the beholder.
Too Late
Technical analysis has been criticized for being too late. By the time the trend is identified, a
substantial portion of the move has already taken place. After such a large move, the reward to
risk ratio is not great. Lateness is a particular criticism of Dow Theory.
Charting Techniques
The set of techniques used in technical analysis in which charts are used to
plot price movements, volume, settlement prices, open interest, and other indicators, in order to
anticipate future price movements. Users of these techniques, called chartists, believe that
past trends in these indicators can be used to extrapolate future trends.
Bar Charts
By default, Aspen charts display bars. A bar is a line representing the trading range, with a hash
mark on either side representing the open and last (or close):
Traditionally, bars are created temporally--that is, the time base of the chart controls bar
formation. In a fifteen minute chart, the trading day is sliced into fifteen minute periods, and the
ticks that occur in a given fifteen minute period form the bar for that period. When the fifteen
minute period ends, a new bar begins.
Candlestick Charting
Candlestick charts are an ancient Japanese price prediction methodology. Candlesticks date back
to the 1700's, when they were used for analyzing rice markets. At that time, Munehisa Homma, a
legendary rice trader, gained a huge fortune using candlestick analysis and established
candlestick popularity.
Aspen supports candlestick charting. Candles offer an alternate perspective on market data.
Up Day
Down Day
The body of the candlestick is called the real body and represents the range between the open
and closing prices. A "black," or filled-in, body represents that the close during that time period
was lower than the open. When the body is "white," or hollow, the close is higher than the open.
The thin vertical line above and/or below the real body is called the upper/lower shadow,
representing the high/low price extremes for the period.
Candlestick charting involves formation identification.
O (Down Trend)
1. Is today's low lower by at least one box
size?
In the Horizontal Scale group, open the Width combo box and choose Equal Tick.
In the Horizontal Scale group, set the Ticks field to the number of ticks you want
into the bar.
An Equal Tick chart is rendered using data from Aspen's ticks data base.
Continuation Charts
Futures, by definition, have a limited life. They start trading and expire on a regular basis. The
unfortunate result of this reality is that long term technical analysis on a given futures contract is
not possible. Continuation charts solve this problem by chaining futures contracts together.
Continuation charts chain futures contracts according to the criteria you set. Aspen provides two
continuation methods. You can define the chaining behavior of both methods by right-clicking on
a chart and choosingProperties... Click the Continuations tab and modify either one or both of the
continuation methods.
2.
Select the scaling you want from the Vertical Scale group.
An investment theory that states it is impossible to "beat the market" because stock market
efficiency causes existing share prices to always incorporate and reflect all relevant information.
According to the EMH, stocks always trade at their fair value on stock exchanges, making it
impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices.
As such, it should be impossible to outperform the overall market through expert stock selection
or market timing, and that the only way an investor can possibly obtain higher returns is by
purchasing riskier investments.
Strong-form EMH
In its strongest form, the EMH says a market is efficient if all information relevant to the value of
a share, whether or not generally available to existing or potential investors, is quickly and
accurately reflected in the market price. For example, if the current market price is lower than the
value justified by some piece of privately held information, the holders of that information will
exploit the pricing anomaly by buying the shares.
Semi-strong-form EMH
In a slightly less rigorous form, the EMH says a market is efficient if all relevant publicly
available information is quickly reflected in the market price. This is called the semi-strongform
of the EMH. If the strong form is theoretically the most compelling, then the semi-strong form
perhaps appeals most to our common sense. It says that the market will quickly digest the
publication of relevant new information by moving the price to a new equilibrium level that
reflects the change in supply and demand caused by the emergence of that information. What it
may lack in intellectual rigour, the semi-strong form of EMH certainly gains in empirical
strength, as it is less difficult to test than the strong form.
Weak-form EMH
In its third and least rigorous form (known as the weak form), the EMH confines itself to just one
subset of public information, namely historical information about the share price itself. The
argument runs as follows. New information must by definition be unrelated to previous
information, otherwise it would not be new. It follows from this that every movement in the
share price in response to new information cannot be predicted from the last movement or price,
and the development of the price assumes the characteristics of the random walk. In other words,
the future price cannot be predicted from a study of historic prices.
Critics of EMH
For about ten years after publication of Fama's classic exposition in 1970, the Efficient Markets
Hypothesis dominated the academic and business scene. A steady stream of studies and articles,
both theoretical and empirical in approach, almost unanimously tended to back up the findings of
EMH. As Jensen (1978) wrote: There is no other proposition in economics which has more solid
empirical evidence supporting it than the EMH.
The assumption that investors are rational and therefore value investments rationally that is, by
calculating the net present values of future cash flows, appropriately discounted for risk is not
supported by the evidence, which shows rather that investors are affected by:
herd instinct
a tendency to under-react or over-react to news (Sheifer, 2000; Barber and Odean, 2000)