Chapter 13: Fundamental and Technical Analysis Flashcards
Method of evaluating capital market conditions, economic conditions, industry conditions, and the condition of individual companies in an attempt to measure intrinsic value of a security
Fundamental Analysis
Method of determining the future price direction of a security based on past price movements
Technical Analysis
Assumes all past market information is fully reflected in current prices, so technical analysis has little to no value
Weak form of the efficient market hypothesis
Assumes that all publicly available information is fully reflected in current prices, meaning technical and fundamental analysis have little to no value
Semi-Strong form of the efficient market hypothesis
Assumes all information is fully reflected in current prices, including both publicly available and insider information.
Strong form of the efficient market hypothesis
Profit-seeking investors in the marketplace react quickly to the release of information. When new information appears, investors reassess the intrinsic value of the stock and adjust their estimation of the price accordingly
Assumptions of the efficient market hypothesis
A stock’s price fully reflects all available information and represents the best estimate of the stock’s true value
Conclusions of the efficient market hypothesis
New information concerning a stock is disseminated randomly over time, so price changes are random and bear no relation to previous prices
Assumptions of the random walk theory
Past price changes contain no useful information because any developments affecting the company have already been reflected in the current price of the stock
Conclusions of the random walk theory
People are rational and have access to all necessary information. People use information intelligently in their own self interests and make intelligent decisions after weighing all information
Assumptions of the rational expectations hypothesis
Past mistakes can be avoided by using available information to anticipate change
Conclusions of the rational expectations hypothesis
How tax changes, government spending, and government debt impact the supply and demand of securities
The Fiscal Policy Impact
How the Bank of Canada promotes Canada’s economic and social welfare, by by attempting to keep the value of the Canadian dollar stable, by keeping inflation low, stable, and predictable
The Monetary Policy Impact
Creates widespread uncertainty and undermines confidence in the future, which tend to result in higher interest rates, lower corporate profits, and lower price-earnings multiples. Leads to higher inventory and labour costs for manufacturers, which is usually passed onto consumers in the form of higher prices, that buyers eventually resist
The Impact of Inflation
This common classification system is used by investment dealers to define the coverage universe of their equity analysts. One problem with this classification is that some products and services operate in more than one industry
Classifying Industries by Product or Service
New industries that are continually developing to provide products and services that meet society’s changing needs and demands.
Emerging Growth Industries
Industries in which sales and earnings are consistently expanding at a faster rate than most other industries. Should have an above average rate of earnings on invested capital over several years.
Growth Industries
Industries that experience slower, more stable growth in sales and earnings that more closely matches the overall rate of economic growth.
Mature Industries
Companies that have moved from the mature stage because they have stopped growing. Produce products for which demand has declined because of changes in technology, an inability to compete on price, or changes in consumer taste.
Declining Industries
Companies choose to enter an industry depending on the amount of capital required, opportunities to achieve economies of scale, the existence of established distribution channels, regulatory factors, and product differences.
Threat of New Entry
The degree of competition between existing firms. Depends on the number of competitors, their relative strength, the rate of industry growth, and the extent to which the products are unique.
Competitive Rivalry
The potential for pressure from substitute products. Other industries may have similar products that compete with the industry’s products.
Threat of Substitutes
The extent to which buyers of the product or service can put pressure on the company to lower prices.
Bargaining Powers of Buyers
The extent to which suppliers can put pressure on the company to pay more for the resources they supply.
Bargaining Powers of Suppliers
Industries where the adverse effects of a downturn in the business cycle will affect them most.
Cyclical Industries
Have a relatively stable return on equity and tend to do relatively well during recessions. Usually blue chip, which maintain earnings and dividends through good times and bad and reflects a dominant market position, strong internal financing, and effective management.
Defensive Industries
Usually applies to industries in which risk and uncertainty are unusually high because analysts lack definitive information.
Speculative Industries
- All influences on market action are automatically accounted for or discounted in price activity.
- Prices move in trends, and those trends tend to persist for relatively long periods of time.
- The future repeats the past.
Assumptions of Technical Analysis
The analysis of graphic representations of relevant market data. The most common type graphs the high, low, and close of a particular asset.
Chart Analysis
The bottom price of the trading range for the security. It is the price at which most investors sense value and are willing to buy the security, and where demand begins to grow. Most short sellers are unwilling to sell at this price, so supply is low, so prices rise.
Support Levels
The top price of the trading average. Most investors are willing to sell, most buyers are unwilling to buy. Supply exceeds demand and prices fall.
Resistance Levels
The most frequently observed reversal pattern, observed in chart analysis.
head-and-shoulders formation
The line joining the two recovery points in a head-and-shoulders formation, that confirms a reversal pattern.
The Neckline
Represents a fairly even struggle between buyers and sellers. The activity repeats itself back and forth until one side proves stronger and the stock price breaks out.
Symmetrical Triangle Formation
If the price breaks through the moving average line from below on heavy volume, and if the moving average line itself starts to move higher, it means that the declining trend has reversed.
Buy Signal
A device for smoothing out fluctuating values in an individual stock or the aggregate market as a whole. Calculated by adding the closing prices for a stock over a predetermined period and dividing the total by the number of days or weeks in the period selected.
Moving average
If the price breaks through the moving average line from above on heavy volume and if the moving average line itself starts to fall, it means that the upward trend has reversed.
Sell signal
A measure of investor expectations. Contrarian investors use these indicators to determine what the majority of investors expect prices to do in the future, so that they can move in the opposite direction.
Sentiment Indicators
Can help forecast when the market will start moving in a particular direction and when it will ultimately reach its peak or trough.
Cycle Analysis
The category of cycle length that is greater than two years.
Long Term
The category of cycle length that is one year.
Seasonal
The category of cycle length that is 9 - 26 weeks.
Primary / Intermediate
The category of cycle length that is four weeks.
Trading
