ASSIGNMENT NO: 2

FUNDAMENTAL ANALYSIS COVERING EIC,

TECHNICAL ANALYSIS AND CHARTING

TECHNIQUES,

EFFICIENT MARKET HYPOTHESES

SUBMITTED TO:- SUBMITTED BY:-ASSIT. PROF AGRIM VERMA NAME ANJALI GUPTA ROLL NO:-463 CLASS:-MBA 4( D)

Fundamental Analysis covering EIC, Technical Analysis and Charting Techniques, Efficient Market Hypotheses

Meaning of Fundamental AnalysisA method of evaluating a security that entails attempting to measure its intrinsic value by

examining related economic, financial and other qualitative and quantitative factors.

Fundamental analysts attempt to study everything that can affect the security's value, including

macroeconomic factors (like the overall economy and industry conditions) and company-specific

factors (like financial condition and management). 

What it is:

Fundamental analysis attempts to understand and predict the intrinsic value of stocks based on an in-depth analysis of various economic, financial, qualitative, and quantitative factors.

How it works/Example:

Fundamental analysis observes numerous elements that affect stock prices such as sales, price toearnings (P/E) ratio, profits, earnings per share (EPS), as well as macroeconomic and industry specificfactors.

Fundamental analysts use either top-down or bottom-up methods of analysis, or sometimes both.

A top-down analysis might function in the following manner:

1) The entire market is analyzed, including global and macroeconomic indicators2) The specific sector, such as Technology3) The industry, for example semiconductor manufacturers4) The specific stock, for example company ABC

Conversely, a bottom-up analysis starts by investigating specific stocks first.

The fundamental analyst observes trends, market and price movements, company financial statements, interest rates, return on equity (ROE), and numerous other indicators with one goal in mind: buying or selling stocks that will provide a high return on investment (ROI)

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

This method of security analysis is considered to be the opposite of technical analysis.

Fundamental analysis can be explained as a method of estimating a security which involves

attempting to evaluate its basic value by assessing allied financial, economic, and other

quantitative and qualitative factors. Fundamental analysis aims at studying everything which

affects the value of the security, including macro-economic factors (such as the overall economy

and industry conditions) and company-specific factors (including financial condition and

management).

fundamental analysis aims at using real data to evaluate the value of a security. Even though

most analysts use fundamental analysis to evaluate stocks, this technique can be used for almost

any type of security

Objective of Fundamental analysisThe main goal of carrying out fundamental analysis is to generate a value that an investor can

weigh against the current price of the security, with the goal of outlining the type of position to

take with that security (underpriced = buy, overpriced = short or sell). In terms of stocks,

fundamental analysis emphasizes on the financial statements of the company being assessed

Example of fundamental analysis

Fundamental analysis can be illustrated as the example mentioned ahead. Let us assume that an

investor can execute fundamental analysis on the value of a bond by looking at economic factors

including interest rate and overall state of the economy, as well as information about the bond

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

9. Influences on short 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:-

The investor has to analyze some of the factors, such as

1. Growth of the industry :

The historical performance of the industry in the terms of growth and profitability should be analyzed. Industry wise growth is published periodically by the Centre for Monitoring Indian Economy.

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. Research and development :

for any industry to survive the competition in the national and international markets, product and production process have to be technically competitive.

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 inter-relationship among the company related variables. The present and future values are affected by a number of factors(i.e)

Competitive edgeEarnings Capital structureManagementFinancial 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:

Price Discounts Everything

Price Movements Are Not Totally Random

“What” Is More Important than “Why”

Price Discounts Everything

This theorem is similar to the strong and semi-strong forms of market efficiency. Technical

analysts believe that the current price fully reflects all information. Because all information is

already reflected in the price, it represents the fair value, and should form the basis for analysis.

After all, the market price reflects the sum knowledge of all participants, including traders,

investors, portfolio managers, buy-side analysts, sell-side analysts, market strategist, technical

analysts, fundamental analysts and many others. It would be folly to disagree with the price set

by such an impressive array of people with impeccable credentials. Technical analysis utilizes

the information captured by the price to interpret what the market is saying with the purpose of

forming a view on the future.

Prices Movements are not Totally Random

Most technicians agree that prices trend. However, most technicians also acknowledge that there

are periods when prices do not trend. If prices were always random, it would be extremely

difficult to make money using technical analysis.

"What" is More Important than "Why"

A technical analyst knows the price of everything, but the value of nothing”. Technicians, as

technical analysts are called, are only concerned with two things:

1. What is the current price?

2. What is the history of the price movement?

The price is the end result of the battle between the forces of supply and demand for the

company's stock. The objective of analysis is to forecast the direction of the future price. By

focusing on price and only price, technical analysis represents a direct approach. Fundamentalists

are concerned with why the price is what it is. For technicians, the why portion of the equation is

too broad and many times the fundamental reasons given are highly suspect. Technicians believe

it is best to concentrate on what and never mind why. is simple, more buyers (demand) than

sellers (supply). After all, the value of any asset is only what someone is willing to pay for it.

General Steps to Technical Evaluation

Many technicians employ a top-down approach that begins with broad-based macro analysis.

The larger parts are then broken down to base the final step on a more focused/micro

perspective. Such an analysis might involve three steps:

Broad market analysis through the major indices such as the S&P 500, Dow Industrials,

NASDAQ and NYSE Composite.

Sector analysis to identify the strongest and weakest groups within the broader market.

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.

Momentum: Momentum is usually measured with an oscillator such as MACD. If MACD is

above its 9-day EMA (exponential moving average) or positive, then momentum will be

considered bullish, or at least improving.

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:

Strength of the current trend.

Maturity or stage of current trend.

Reward to risk ratio of a new position.

Potential entry levels for new long position.

Strengths of Technical Analysis

Focus on Price

If the objective is to predict the future price, then it makes sense to focus on price movements.

Price movements usually precede fundamental developments. By focusing on price action,

technicians are automatically focusing on the future. The market is thought of as a leading

indicator and generally leads the economy by 6 to 9 months. To keep pace with the market, it

makes sense to look directly at the price movements.

Supply, Demand, and Price Action

Many technicians use the open, high, low and close when analyzing the price action of a

security. There is information to be gleaned from each bit of information. Separately, these will

not be able to tell much. However, taken together, the open, high, low and close reflect forces of

supply and demand.

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.

Pictorial Price History

Even if you are a tried and true fundamental analyst, a price chart can offer plenty of valuable

information. The price chart is an easy to read historical account of a security's price movement

over a period of time. Charts are much easier to read than a table of numbers. On most stock

charts, volume bars are displayed at the bottom. With this historical picture, it is easy to identify

the following:

Reactions prior to and after important events.

Past and present volatility.

Historical volume or trading levels.

Relative strength of a stock versus the overall market.

Weaknesses of Technical Analysis

Analyst Bias

Just as with fundamental analysis, technical analysis is subjective and our personal biases can be

reflected in the analysis. It is important to be aware of these biases when analyzing a chart. If the

analyst is a perpetual bull, then a bullish bias will overshadow the analysis. On the other hand, if

the analyst is a disgruntled eternal bear, then the analysis will probably have a bearish tilt.

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 TechniquesThe 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 ChartsBy 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 ChartingCandlestick 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. 

Point & FigureIf you are new to Point & Figure charting and are familiar with bar or candlestick charting, point and figure may appear strange at first. There is no time scale, just columns of Xs and Os. Point & Figure came into popularity long before computers, when all charting was done by hand. As a

kind of short hand charting technique, Point & Figure made it possible to update charts on 50 or more instruments in less than an hour. In Point & Figure charting, Xs represent upward movement and Os represent downward movement. With a set box size and reversal amount (traditionally 1 and 3, respectively), Point & Figure asks two questions, depending on current market direction: 

X (Up Trend) O (Down Trend)

1. Is today's high higher by at least one box size?

1. Is today's low lower by at least one box size?

2. Is today's low lower than the difference of the current high less the reversal amount?

2. Is todays high higher than the sum of the current low plus the reveral amount?

 

Equal Tick ChartsThe easiest way to understand Equal Tick charts is to compare them to traditional bars. A traditional bar is based in time--that is, a fifteen minute chart slices the trading day into fifteen minute periods, and ticks that fall within a particular fifteen minute period contribute to the formation of the respective bar. To display an Equal Tick chart, follow these steps: 

Right click on the chart and choose Properties...  Click the Scale tab.

  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 ChartsFutures, 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. 

Multiple Instrument ChartsHave you ever tried to diversify a securities portfolio and wondered whether two securities trade together? Use a multiple instrument chart to make this judgment.The quickest way to create a multiple instrument chart is to click the Add Instrument icon  in the tool bar. Then type the instrument you want to add and press Enter. The price scale is a major consideration in multiple instrument plotting. If one instrument trades at 90 and the other at 10, you will see bars drawn along the top and bottom of the chart. This is the normal behavior of linear scaling (which is the default scale of charts). In such cases, you may want to resort to percent change or logarithmic scaling. To change the chart scale, follow these steps: 1. Right click on the chart and choose Properties... 2. Select the scaling you want from the Vertical Scale group.

MEANING OF 'EFFICIENT MARKET HYPOTHESIS - EMH'

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.

Definition of Efficient Markets Hypothesis (EMH)

The efficient markets hypothesis (EMH) is an investment theory that asserts that financial

markets are "informationally efficient." That is, markets always reflect all available information

about an asset's value. According to EMH, an investor should not be able to use market timing

techniques or expert stock selection to outperform the market. There are three variations of the

hypothesis. The strong version asserts that all information, including insider information, is

instantly reflected in an asset's price. Semi-strong theory includes only current information

available to the public. The weak version asserts only past information available to the public is

reflected. While EMH is a fundamental theory, it is subject to ongoing debate about its validity,

especially in times of major disruption in the financial markets

 The Efficient Markets Hypothesis (EMH)

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 ‘churn’ their portfolios

a tendency to under-react or over-react to news (Sheifer, 2000; Barber and Odean, 2000)

asymmetrical judgements about the causes of previous profits and losses.