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Fundamental analysis and technical analysis

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Fundamental analysis and technical analysis

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Fundamental analysis and technical analysis

  1. 1. FUNDAMENTAL ANALYSIS Mohammed Umair
  2. 2. WHAT IS FUNDAMENTAL ANALYSIS? • Fundamental analysis is a technique that attempts to determine a security‘s value by focusing on underlying factors that affect a company's actual business and its future prospects. WHY FUNDAMENTAL ANALYSIS? Fundamental analysis answers the following question 1. Is the company’s revenue growing? 2. Is it actually making a profit? 3. Is it in a position strong-enough to outrun its competitors in the future? 4. Is it able to repay its debts? 5. Is management trying to "cook the books"?
  3. 3. FUNDAMENTAL ANALYSIS • Fundamental analysis can be composed of many different aspects: the analysis of the economy as the whole, the analysis of an industry or that of an individual company. FUNDAMENTAL ANALYSIS Economic Analysis Company Analysis Industry Analysis
  4. 4. ECONOMY ANALYSIS • The performance of a company depends much on the performance of the economy if the economy. • The first step to this type of analysis includes looking at the macroeconomic situation.
  5. 5. ECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKET INDICATOR FAVOURABLE IMPACT UNFAVOURABLE IMAPACT GDP/GROWTH RATE HIGH GROWTH RATE SLOW GROWTH RATE DOMESTIC SAVINGS RATE HIGH LOW INTEREST RATES LOW HIGH TAX RATES LOW HIGH INFLATION LOW HIGH IIP/INDUSTRIAL PRODUCTION HIGH LOW BALANCE OF TRADE POSITIVE NEGATIVE BALANCE OF PAYMENTS POSITIVE NEGATIVE
  6. 6. ECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKET INDICATOR FAVOURABLE IMPACT UNFAVOURABLE IMAPACT FOREIGN EXCHANGE POSITION HIGH LOW DEFICIT FINANCING/FISCAL DEFICIT LOW HIGH AGRICULTURAL PRODUCTION HIGH LOW INFRASTRUCTURAL FACILITIES GOOD NOT GOOD
  7. 7. Company Analysis • It involves a close investigative scrutiny of the companies financial and non financial aspects with a view to identifying its strength, weaknesses and future business prospects. Company Analysis financial non financial • Non Financial Factors Marketing success Business Model Competitive Advantage Management Corporate Governance
  8. 8. Company Analysis-Non Financial Aspects : History, Promoters and Management Review Questions How old is the company? Who are the promoters?  Is it family managed or professionally managed? What is the public image and reputation of the company, its promoters and its products? Aspects : Technology, Facilities and Production Review Questions Does the company use relevant technology?  Is there any foreign collaboration? Where is the unit located? Are the production facilities well balanced?  Is the size the right economic size?  What are the production trends? What is the raw material position?  Is the process power- intense?  Are there adequate arrangements for power?
  9. 9. Company Analysis-Non Financial Aspect: Product range, Marketing, Selling and Distribution Review Question:  What is the company‘s product range? Are there any cash cows among the product portfolio?  How distribution-effective is the marketing network? What is the brand image of the products?  What is the market share enjoyed by the products in the relevant segments? What are the effects and costs of sales promotion and distribution? Aspect: Industrial relations, Productivity and Personnel Review Question: How important is the labour component? What is the labour situation in general? Aspect: Environment Review Question: Are there any statutory controls on production, price, distribution, raw material, etc?  Is there any major legal constraint? What are the government policies on the industry (domestic as well as related to imports and exports of the final products and raw materials)?
  10. 10. SWOT ANALYSIS Strengths • Latest Technology • Lower delivered Cost • Established products • Committed manpower • Advantageous location • Strong finances • Well- known brand names Weaknesses • Loose controls • Untrained labour force • Strained cash flows • Poor product quality • Family funds • Poor public image Opportunities • Growing domestic demand • Expanding export markets • Cheap labour • Booming capital markets • Low interest rates Weaknesses • Price War • Intensive competition • Undependable component • Suppliers • Infrastructure bottlenecks • Power cuts
  11. 11. FACEBOOK SWOT Strengths Integration with websites and applications More than a billion active monthly users Excellent users experience Understanding of user’s needs and behavior Weaknesses Weak CTR of advertisements Social network lacks of some features One source of revenues – advertisements on Facebook Attitude towards users’ privacy Lack of website customization Weak protection of users’ information Opportunities Increasing number of people using Facebook through mobile devices Expansion to China Diversify sources of revenue Open Facebook marketplace Threats Increasing number of mobile internet users Users using ad-block extensions Slow growth rate of online advertising Identity thefts Weak business model
  12. 12. Industry intelligence An industry intelligence is a business tool carried out to assess profit potential and the complexity of a particular industry. 1. Industry intelligence is assessed based of key factors relating to the industry such as the history of the industry, 2. Analysis of the industries financial performance, 3. Industry life cycle, 4. A review of how differing trends such as seasonal fluctuations affect the industry, 5. External influences on the industry such as government laws and 6. A review of levels of competition both present and future for the specific industry.
  13. 13. Porter’s Five Forces- Industry Analysis: 1. Industry rivalry: Indicates degree of competition among existing firms, cut throat competition leads to reduced profit potential for companies in the same industry 2. Threat of substitutes: Availability of substitute products or services will limit a firm’s ability to raise prices 3. Bargaining power of buyers: It represents powerful buyers have a significant impact on prices 4. Bargaining power of suppliers: It highlights powerful suppliers can demand premium prices and limit your profit 5. Barriers to entry: it includes threats of new entrants that can act as a deterrent against new competitors
  14. 14. Industry intelligence • An industry intelligence is a business tool carried out to assess profit potential and the complexity of a particular industry. • Industry intelligence is assessed based of key factors relating to the industry such as the history of the industry, • analysis of the industries financial performance, • industry life cycle, • a review of how differing trends such as seasonal fluctuations affect the industry, • external influences on the industry such as government laws and • a review of levels of competition both present and future for the specific industry.
  15. 15. Porter’s Five Forces- Industry Analysis: 1. Industry rivalry: Indicates degree of competition among existing firms, cut throat competition leads to reduced profit potential for companies in the same industry 2. Threat of substitutes: Availability of substitute products or services will limit a firm’s ability to raise prices 3. Bargaining power of buyers: It represents powerful buyers have a significant impact on prices 4. Bargaining power of suppliers: It highlights powerful suppliers can demand premium prices and limit your profit 5. Barriers to entry: it includes threats of new entrants that can act as a deterrent against new competitors
  16. 16. Competitors’ intelligence • Competitors’ intelligence in international business is an assessment of the strengths and weaknesses of current and potential competitors. • It involves primarily two activities: 1. obtaining information about important competitors and 2. using that information to predict competitor behavior. Identifying competitors Competitors Analysis Profiling Competitors Comparison of your potentials with competitors Developing Marketing Strategy Most firms face four basic types of Competition: 1. Brand competitors, refers to competition with different brands offering with similar features, prices and benefits to the same potential customers. 2. Product competitors, offer same product class but with offer different benefits, features, and prices. 3. Generic competitors, are rival firms offering products which are different but are capable of satisfying the same basic want or provide the same benefit or utility to the prospective customer. 4. Total budget competitors, primarily focus on prices, they compete for the limited financial resources of the same customers.
  17. 17. Various types of competition Product Need Brand Competitors Product Competitors Generic Competitors Total Budget Competitors Colleges Education St. Joseph’s, Christ, Jain, Jyoti Nivas, Mount’s, Kristu Jayanti Distance Education, Community college. Books, Internet, Apprenticeship, Seminars. Public Colleges Movies Entertainment Avengers, Spiderman, Ice age, Shrek, Batman, Immortals, Mission Impossible. Cable TV, Pay-per-view on DTH, DVD rentals Sporting events like IPL, Music Concerts, Exhibitions, Melas. Relative and friends house, reading, Parks, Museum. Soft Drinks Refreshment Coca-Cola, Pepsi, Tropicana, Frooti Minute Maid, Appy Tea, Coffee, Badam Milk, Fruit Juice, Lime soda, Butter milk. Tap water, Prasadam (given in religious places) Candy, Pani puri, Pop corn, Vada pav, Pakoda. Sedans (Large Cars) Transportation Maruti Suzuki, Ford Hyundai, Toyota Honda, Nissan Jeeps, Hatchbacks, SUVs, Minivans, MUVs Rental cars, Bikes, BMTC, Metro. car-sharing, ride-sharing, lift-sharing
  18. 18. Profitability A.(a) Gross profit Margin (b) Net profit Margin (c) Earning power (d) Return on equity (e) Earning per share (f) Cash EPS B. Financial Statement Analysis  Trading, P& L A/C Analysis  Balance Sheet Analysis C. Ratio Analysis  Liquidity Ratios  Leverage Ratios  Profitability Ratios  Activity / Efficiency Ratio
  19. 19. Outcome of FUNDAMENTAL ANALYSIS  The end goal of performing fundamental analysis is to produce a value that an investor can compare with the underlying assets current price in hopes of figuring out what sort of position to take with that security(under priced = buy, overpriced = sell).  Valuation of Stock  The intrinsic value of a share is the present value of all future cash flows INTRINSIC VALUE = DIVIDENDS + CAPITAL APPRECIATION Investment decision: 1. If the market price of a share is currently lower than its intrinsic value, such a share would be bought because it is perceived to be under-priced. 2. A share whose current market price is higher than its intrinsic value would be considered as overpriced and hence sold.
  20. 20. PRICE –QUALITY MATRIX LQ HP HQ HP LQ LP HQ LP MQ MP PRICE QUALITY YESTERDAY’S BLUE CHIPS EMERGING BLUE CHIPS TURN AROUND STOCK NON BLUE CHIPS EVERGREEN STOCK A blue-chip: Stock of a large, well-established and financially sound company that has operated for many years.
  21. 21. 1 The non-blue chips PRICE –QUALITY MATRIX a. Feature: These shares are of low quality and hence are quoted at low prices. b. Should we buy: Just ignore them until there is an upswing in their fortunes. c. But Why? You should not buy something simply because it is cheap. Remember, what appears cheap may ultimately prove very expensive. 2 Emerging blue chips a. Feature: High – Quality, High - Price (HQHP) b. Should we buy: Hold on to them. c. But Why? They are current stars, popular and command a high price. As long as their glamour last, such shares perform well in the market. But be careful, partial booking of profits at high price may be desirable.
  22. 22. 3 Yesterdays blue chips PRICE –QUALITY MATRIX a. Feature: Low – Quality, High - Price (LQHP). You can call these the stocks with the hangover effect b. Should we buy: Such scrip's should be sold fast. Do not look at such a share again until the company returns to the growth track. c. But Why? You can call these the stocks with the hangover effect‘. Once they had the market on a high but they are more or less banking on their past glory now. Once this fact is recognized, the market downgrades such stocks and their prices tumble. 4 Emerging blue chips a. Feature: Medium – Quality, Medium - Price (MQMP): These are steady scrip's. b. Should we buy: Don‘t be in a hurry to sell them. c. But Why? They can last for two to three generations fairly intact. Hold on to them.
  23. 23. TECHNICAL ANALYSIS What to Expect? a. Introduction to Technical Analysis b. 3 Hours is too less a time to expect anything w.r.t Technical Analysis, there’s too much out there c. Expect just an introduction to what is technical analysis d. Get yourself convinced by end of the presentation that technical analysis is good enough to buy and sell stocks.
  24. 24. Introduction • Should I take a long position? Should I take a short position? What is going to be the price tomorrow, next week or next year? • Technical analysis is the attempt to forecast stock prices on the basis of market-derived data. • Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time. • What wiki says? • Technical analysis is a security analysis discipline for forecasting the future direction of prices through the study of past market data, primarily price and volume. • John J. Murphy: • TA is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. • Bottom Line: • Technical analysis is a method to predict the future behaviour of securities, with the use of past data.
  25. 25. How to do Technical Analysis? TECHNICAL ANALYSIS Fundamental Analysis Industry Analysis Company Analysis Economic Analysis Theories Charting Moving Averages
  26. 26. Trend time horizons that vary greatly Stock Price trend of Jet Airways Do charts Speak?
  27. 27. Do charts Speak? • Consider the basic assumptions presented by Robert D. Edwards and John Magee in the classic book, Technical Analysis of Stock Trends: • Stock prices are determined solely by the interaction of demand and supply. • Stock prices tend to move in trends. • Shifts in demand and supply cause reversals in trends. • Shifts in demand and supply can be detected in charts. • Chart patterns tend to repeat themselves. Stock Price trend of Jet Airways Technical analysis is based on one major assumption—trend. Markets trend.  Traders and investors hope to buy a security at the beginning of an uptrend at a low price, ride the trend, and sell the security when the trend ends at a high price.  Although this strategy sounds very simple, implementing it is exceedingly complex.
  28. 28. Different Kind of Charts used: 1. Line charts 2. Bar charts 3. Candlesticks Charting the Market • Chartists use bar charts, candlestick, or point and figure charts to look for patterns which may indicate future price movements. • They also analyze volume and other psychological indicators (breadth, % of bulls vs % of bears, put/call ratio, etc.). • Strict chartists don’t care about fundamentals at all.
  29. 29. Candlesticks Drawing Bar (OHLC) Charts  A candlestick chart is a style of bar-chart used primarily to describe price movements of a security, derivative, or currency for a designated span of time.  It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval.  A chart that displays the high, low, opening and closing prices for a • Each bar is composed of 4 elements: • Open • High • Low • Close Open Close High Low Standard Bar Chart Japanese Candlestick Open Close High Low Standard Bar Chart Japanese Candlestick security for a single day.
  30. 30. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).
  31. 31. Line Chart • A style of chart that is created by connecting a series of data points together with a line. • This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line. • A line chart can give the reader a fairly good idea of where the price of an asset has traveled over a given time frame. Infosys
  32. 32. Head and Shoulders This formation is characterized by two small peaks on either side of a larger peak. H&S Top Head H&S Bottom Head Left Shoulder Left Shoulder Right Shoulder Right Shoulder Neckline Neckline head-and-shoulders chart pattern 1. Rises to a peak and subsequently declines. Then, the price rises above the former peak and again declines. 2. And finally, rises again, but not to the second peak, and declines once more. 3. The first and third peaks are shoulders, and the second peak forms the head Inverse Head-and-Shoulders This is a reversal pattern, meaning that it signifies a change in the trend. Formation of the pattern: 1. Left shoulder: Price declines and moves higher. 2. Head: another Decline occurs to a lower level. 3. Right shoulder: Price then moves higher and moves back lower, but not as low as the head In this pattern, the neckline is a level of support or resistance.
  33. 33. How to Trade the Pattern? It is very important that traders wait for the pattern to complete. • In the head and shoulders we are waiting for price action to move lower than the neckline after the peak of the right shoulder. • For the inverse head and shoulder, we wait for price movement above the neckline after the right shoulder is formed. S S H Support Level Sell Signal
  34. 34. Double Bottom Example Buy Signal support Level
  35. 35. Double Tops and Bottoms • These formations are similar to the H&S formations, but there is no head. • These are reversal patterns with the same measuring implications as the H&S. Double Top Target Target Double Bottom
  36. 36. Trends  The meaning of trend in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction.  A trend represents a consistent change in prices (i.e. a change in investor’s expectations)  A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock.
  37. 37. Types of Trend  Uptrends
  38. 38. Types of Trend  Downtrend
  39. 39. Types of Trend  Sideways Trend
  40. 40. Support and Resistance  Support level is a price level where the price tends to find support as it is going down
  41. 41. Support and Resistance  Resistance Level is a price level where the price tends to find resistance as it is going up
  42. 42. Importance of Support and Resistance  Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing.
  43. 43. Aware: Support and Resistance levels  Support and Resistance levels are highly volatile  Traders should not buy and sell directly at these points as there may be breakout also A support is plotted at the daily low price and resistance at the daily high price.
  44. 44. Breakout  The penetration of support and resistance level is called breakout
  45. 45. Trader’s Remorse  Returning to the level of support or resistance after a breakout is called trader’s remorse.
  46. 46. Resistance <-> Support
  47. 47. Moving Averages • A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. • While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. • For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 11, would be dropped.
  48. 48. Moving Averages An indicator is anything that can be used to predict future financial or economic trends. • Leading (Bullish)-Above average • Leading - These types of indicators signal future events. • Lagging (Bearish)-Below Average • A lagging indicator is one that follows an event. 1. Relative Strength Index (RSI) 2. Moving average convergence divergence (MACD) 3. Fibonacci Retracement
  49. 49. 1. Note that all moving averages are lagging indicators and will always be "behind" the price. 2. When prices are trending, moving averages work well. 3. However, when prices are not trending, moving averages can give misleading signals.
  50. 50. Moving Averages
  51. 51. DOW THEORY Bhavishyavaani of Stocks
  52. 52. Introduction and Historical Perspective • How Dow Theory was made? • Dow theory was formulated from a series of Wall Street Journal editorials authored by Charles H. Dow from 1900 until the time of his death in 1902. • What is Dow theory? • These editorials reflected Dow’s beliefs on how the stock market behaved and how the market could be used to measure the health of the business environment. • Who made Dow theory? • Due to his death, Dow never published his complete theory on the markets, but several followers and associates have published works that have expanded on the editorials. • Some of the most important contributions to Dow theory were William P. Hamilton's "The Stock Market Barometer" (1922), Robert Rhea's "The Dow Theory" (1932), E. George Schaefer's "How I Helped More Than 10,000 Investors To Profit In Stocks" (1960) and Richard Russell's The Dow theory on stock price movement is a form of technical analysis that includes some aspects of sector rotation.
  53. 53. Dow Theory • Dow first used his theory to create the Dow Jones Industrial Index and the Dow Jones Rail Index (now Transportation Index), which were originally compiled by Dow for The Wall Street Journal. • Dow created these indexes because he felt they were an accurate reflection of the business conditions within the economy because they covered two major economic segments: industrial and rail (transportation). • While these indexes have changed over the last 100 years, the theory still applies to current market indexes. Dow himself never used the term Dow theory nor presented it as a trading system. 1. Dow believed that the stock market as a whole was a reliable measure of overall business conditions within the economy. 2. By analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and the likely direction of individual stocks.
  54. 54. Six basic tenets of Dow theory 1. The market has three movements 2. Market trends have three phases 3. The stock market discounts all news 4. Stock market averages must confirm each other 5. Trends are confirmed by volume 6. Trends exist until definitive signals prove that they have ended
  55. 55. 1. The market has three movements • Primary Trend Dow theory identifies three trends within the market: primary, secondary and minor. • The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish. • Secondary Trend • The intermediate trends are corrective movements, which may last for three weeks to three months. The primary trend may be interrupted by the intermediate trend. • Minor Trend • The short term trend refers to the day to day price movement.  Most proponents of Dow theory focus their attention on the primary and secondary trends, as minor trends tend to include a considerable amount of noise.  If too much focus is placed on minor trends, it can to lead to irrational trading, as traders get distracted by short-term volatility and lose sight of the bigger picture.
  56. 56. 1. The market has three movements Tata Motors - 2 years Tata Motors – 5 years Tata Motors – 1 years Primary Trend The "main movement", primary movement or major trend may last from less than a year to several years. It can be bullish or bearish.
  57. 57. Kingfisher Airlines– 5 years Kingfisher Airlines- 2 years Kingfisher Airlines– 1 years
  58. 58. He postulated three types of price movements over time: • (1) major trends that are like tides in the ocean, • (2) intermediate trends that resemble waves, and • (3) short-run movements that are like ripples.
  59. 59. 2. Market trends have three phases Dow theory asserts that major market trends are composed of three phases: • Primary Upward Trend (Bull Market) • The first stage of a bull market is referred to as the accumulation phase, which is the start of the upward trend. This is also considered the point at which informed investors start to enter the market. • The accumulation phase typically comes at the end of a downtrend, when everything is seemingly at its worst. • But this is also the time when the price of the market is at its most attractive level because by this point most of the bad news is priced into the market, thereby limiting downside risk and offering attractive valuations. • However, the accumulation phase can be the most difficult one to spot because it comes at the end of a downward move, which could be nothing more than a secondary move in a primary downward trend - instead of being the start of a new uptrend. The first phase is the accumulation phase, where the asset quietly goes up without too much attention being paid by the general public, and few people participate. This is the “dirt cheap” phase of gold when only true believers assumed positions
  60. 60. Uptrend Lower Peaks ---Buy--Up Tread Primary Upward Trend (Bull Market)
  61. 61. 2. Market trends have three phases Dow theory asserts that major market trends are composed of three phases: • Primary Downward Trend (Bear Market) • The second phase is the awareness phase, where seasoned professionals and a few more sophisticated funds take their positions. • The general public begins to take notice and some people participate, driving prices higher at a little faster pace. • This is also a more volatile phase, where we could see more substantial daily price swings. • It is in the second phase where we see the most painful secondary corrections (Where we currently are). • This phase will also be characterized by persistent market pessimism, with many investors thinking things will only get worse.
  62. 62. Uptrend Higher Peaks---Sell--Down trend Primary Downward Trend (Bear Market)
  63. 63. The Panic Phase • Every major primary bull market ends up with a wildly speculative third phase, which is the panic phase, where the public and crowd rush head-long into the market, driving prices up exponentially • In the panic phase, the market is wrought up with negative sentiment, including weak outlooks on companies, the economy and the overall market.
  64. 64. 3. The stock market discounts all news • Stock price represents sum of all hopes, greed, fears and expectations of all the traders and investors and stock price discounts all information’s. • What Information’s Stock Market Discount’s? • Stock Market quickly reflects information’s in it’s price, as soon as any information or news is available about stock, market will discount all such information weather it’s related to past, present and also for the future therefore, it becomes easy to analyze future price movements on the basis of technical analysis. • So, the person who is following technical analysis for them Dow theory states that stock market discounts all information in stock prices so one doesn’t need to follow other news and information’s like rate of interests, company announcements and all such information will be reflected in price so all you have to keep an eye on is the stock price movements.
  65. 65. 3. The stock market discounts all news • What Stock Market Doesn’t Discount’s? • Stock Market doesn’t discounts natural calamities like Tsunami, Earthquakes etc. All such information doesn’t discounts stock market prices.
  66. 66. 4. Stock market averages must confirm each other • Under Dow theory, a major reversal from a bull to a bear market (or vice versa) cannot be signaled unless both indexes (traditionally the Dow Industrial and Rail Averages) are in agreement.
  67. 67. 5. Trends are confirmed by volume • Dow believed that volume confirmed price trends. • When prices move on low volume, there could be many different explanations. • But when price movements are accompanied by high volume, Dow believed this represented the "true" market view. • If many participants are active in a particular security, and the price moves significantly in one direction, Dow maintained that this was the direction in which the market anticipated continued movement. To him, it was a signal that a trend is developing.
  68. 68. 6. Trends exist until definitive signals prove that they have ended • It relates a physical law to market movement, which states that an object in motion (in this case a trend) tends to continue in motion until some external forces causes it to change direction. • Dow was a firm believer that market remains in a trend. It may deviate for a while because of noise but it will return as soon as its effect is over. • There are many trend reversal signals like support/resistances, price patterns, trend lines, moving averages. Some indicators can also provide warnings of loss of momentum.
  69. 69. Summary 1. The market has three movements 2. Market trends have three phases 3. The stock market discounts all news 4. Stock market averages must confirm each other 5. Trends are confirmed by volume 6. Trends exist until definitive signals prove that they have ended The Dow Theory is a market timing strategy based upon technical analysis.
  70. 70. EFFICIENT MARKET HYPOTHESIS The Collective Wisdom
  71. 71. Concept • A market theory that evolved from a 1960's Ph.D. dissertation by Eugene Fama. • The general concept of the efficient markets hypothesis is that financial markets are "informationally efficient"- • In other words, that asset prices in financial markets reflect all relevant information about an asset. • In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made.
  72. 72. Forms of Market Efficiency The Weak form of EMH  weak-form efficiency), postulates that future stock prices cannot be predicted from historical information about prices and returns.  In other words, the weak form of the efficient markets hypothesis suggests that asset prices follow a random walk and that any information that could be used to predict future prices is independent of past prices. • The Weak form of EMH There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". • In an weak market efficiency, fundamental analysis can help you predict prices. How? • Fundamental analysis is based on public information about a company (reported earing, profit, assets etc.) • Since even updated public information is not spread freely and easily, some people know that information, but not all people. • The "knowledge" public with this information can use it to do fundamental analysis to help them predict share price and beat the people who don't know it. • But technical analysis is still not effective, because it's based on past share prices. (We assume all people know past prices)
  73. 73. Hero Honda split, little short-term impact, more long-term negatives The news of the split drove the stock price down to Rs1,560 on 15th December from a high of Rs2,062 on 30th November—a 24% fall in a fortnight.
  74. 74. Forms of Market Efficiency The Strong form of EMH  All relevant information flows instantly and super quickly.  At any one time, anyone and everyone already knows all relevant information about a share/stock.  No body can earn money by using any information to "analyze" and predict future share price movements (up or down). • The Weak form of EMH There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". • The strong form of EMH assumes that current stock prices fully reflect all public and private information. • It contends that market, non-market and inside information is all factored into security prices and that no one has monopolistic access to relevant information. • It assumes a perfect market and concludes that excess returns are impossible to achieve consistently.
  75. 75. Insider trading in Ranbaxy? • Apr 10, 2014, • Over six trading days, prior to the announcement of its acquisition by Sun Pharma on Monday, Ranbaxy shares rallied 34%. Could it be a case of insider trading? • On 7th April, Ranbaxy Laboratories Ltd (Ranbaxy) announced about its acquisition by Sun Pharmaceutical Industries Ltd (Sun Pharma) in $4 billion deal. Because of this announcement, Ranbaxy share price opened 10% up and made its 52-week high at Rs. 505 on BSE before it ended lower. But why was there a sudden rise in volumes and prices over six trading days, prior to this takeover?
  76. 76. Forms of Market Efficiency There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". The Semi-Strong form of EMH  What if a market in a certain country has something in between "Strong" and "weak" Market efficiency?  We usually call it "Semi-strong" market efficiency.  Information moves and flows semi-quickly (but not too quickly, not as in case of "strong" market efficiency)  So company officers/insiders/relatives/friends know information slightly in advance of the public and have slight advantage over normal investors like you and me.  Inside information may give advantage, but public information is useless.  Fundamental and technical analysis is of no use

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