Chapter 13: Fundamental and Technical Analysis

Overview

• Purpose: Learn how analysts use market and industry information to value securities and make recommendations.
• Methods: Fundamental Analysis and Technical Analysis.

Methods of Equity Analysis

• Fundamental Analysis: Assesses the short, medium, and long-term prospects of industries and companies.
  • Focuses on macroeconomic factors, industry conditions, and company conditions.
  • Compares intrinsic value with the current price to determine overvaluation or undervaluation.
• Technical Analysis: Studies historical stock prices and market behavior to predict future trends.
  • Analyzes market sentiment and psychology.

Fundamental Analysis

Key Areas

• Macroeconomic Factors: Fiscal policy, monetary policy, inflation.
• Industry Analysis: Evaluates industry structure and company strategies.

Concepts

• Efficient Market Hypothesis (EMH): Stock prices reflect all available information.
• Random Walk Theory: Price changes are random and bear no relation to previous prices.
• Rational Expectations Hypothesis: People make intelligent decisions using all available information.

Industry Life Cycle

• Emerging Growth: New industries with rapid innovation.
• Growth Industries: Expanding sales and earnings.
• Mature Industries: Stable growth matching economic growth.
• Declining Industries: Reduced demand and low growth.

Technical Analysis

Key Concepts

• Price Trends: Prices move in trends that persist.
• Market Sentiment: All influences are reflected in price activity.
• Patterns: Historical patterns can predict future trends.

Tools

• Chart Analysis: Uses price charts to identify trends and support/resistance levels.
• Quantitative Analysis: Employs statistics and moving averages to identify trends.
• Sentiment Indicators: Measures investor expectations.
• Cycle Analysis: Predicts market movement timing based on cycles.

Market Theories

• Support and Resistance Levels: Key price points where investors are likely to buy/sell.
• Reversal and Continuation Patterns: Used to predict trend changes or continuations.

Summary

• Fundamental vs Technical: Fundamental focuses on causes, while technical focuses on effects on prices.
• Market Theories: Efficient Market, Random Walk, and Rational Expectations Hypotheses.
• Analysis Tools: Charts, quantitative data, sentiment indicators, and cycle analysis.

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Key Terms

• Fundamental Analysis: Analysis based on financial statements and economic conditions.
• Technical Analysis: Analysis based on historical price movements and trading volumes.
• Efficient Market Hypothesis: Stock prices reflect true value based on all available information.
• Emerging Growth Industries: New industries with potential but high risk.
• Cyclical Industry: Sensitive to economic swings, rising and falling quickly.
• Defensive Industry: Stable earnings and dividends, minimal sensitivity to economic swings.
• Chart Analysis: Use of charts to predict buy/sell decisions.
• Support and Resistance: Price levels indicating potential buy/sell zones.