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Foundations of Technical Analysis Computational Algorithms Statistical Inference and Empirical Implementation

Technical analysis, also known as charting, has been a part of financial practice for many decades, but this discipline has not received the same level of academic scrutiny and acceptance as more traditional approaches such as fundamental analysis. One of the main obstacles is the highly subjective nature of technical analysis the presence of geometric shapes in historical price charts is often in the eyes of the beholder. In this paper, we propose a systematic and automatic approach to technical pattern recognition using nonparametric kernel regression, and we apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical analysis. By comparing the unconditional empirical distribution of daily stock returns to the conditional distribution conditioned on specific technical indicators such as head-and-shoulders or double-bottoms we find that over the 31-year sample period, several technical indicators do provide incremental information...

Implications For Technical Analysis

Technical analysis lias always had an inward focus. Emphasis was placed on a particular market to which a host of internal technical indicators were applied. There Markets provide us with an enormous amount of information. Bonds tell us which way interest rates are heading, a trend that influences stock prices. Commodity prices tell us which way inflation is headed, which influences bond prices and interest rates. The U.S. dollar largely determines the inflationaiy environment and influences which way commodities trend. Overseas equity markets often provide valuable clues to the type of environment the U.S. market is a part of. The job of the technical trader is to sniff out clues wherever they may lie. If they lie in another market, so be it. As long as price movements can be studied on price charts, and as long as it can be demonstrated that they have an impact on one another, why not take whatever useful information the markets are offering us Technical analysis is the study of...

Security Analysis and Stock Selection

Many fund managers' stock selection process is centered on fundamental security analysis and emphasizes companies that are industry leaders or dominate certain niches. These companies generally have certain competitive advantages or franchises. Fund managers choose a company that earns a superior return on its capital and that they believe has the potential to continue to earn superior returns over many years.

Stock Selection Based on Mutual Fund Holdings

Academics have investigated whether individual investors should consider the weightings mutual fund managers place on the stocks held in their funds when making stock selection decisions (Weigand et al., 1973). Specifically, they compare the performance of the stocks that are most heavily weighted in mutual funds vs. the stocks that are most lightly weighted. These studies find that the heavily weighted stocks in mutual funds perform no better than, and sometimes significantly underperform, the most lightly weighted stocks. These results contradict the idea that individual investors can earn excess returns by following the implicit stock selection picks of mutual fund managers, particularly, short-term and momentum investors who trade large-cap stocks. These findings rather suggest that individual investors should be wary of investing in stocks that are the top holdings in general equity mutual funds.

Timing the Market Technical Analysis3

The methods used to analyze securities and make investment decisions fall into two very broad categories fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company to estimate its value. Technical analysis takes a completely different approach it does not care one bit about the value of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.

Equity Securities Common Stock as Ownership Shares

Common stocks, also known as equity securities, or equities, represent ownership shares in a corporation. Each share of common stock entitles its owners to one vote on any matters of corporate governance put to a vote at the corporation's annual meeting and to a share in the financial benefits of ownership1 (e.g., the right to any dividends that the corporation may choose to distribute). The common stock of most large corporations can be bought or sold freely on one or more of the stock exchanges. A corporation whose stock is not publicly traded is said to be closely held. In most closely held corporations, the owners of the firm also take an active role in its management. Takeovers generally are not an issue. 'Sometimes a corporation issues two classes of common stock, one bearing the right to vote, the other not. Because of their restricted rights, the nonvoting stocks sell for a lower price, reflecting the value of control. 2The voting system specified in the corporate articles...

The 1990s bubble in Nasdaq stocks

Stocks in the United States are traded on either the over-the-counter market or on one of the organized stock exchanges, principally the New York Stock Exchange or the American Stock Exchange or one of the regional exchanges in Boston, Chicago, and Los Angeles San Francisco. The typical pattern was that shares of young firms would initially be traded on the over-the-counter market and then most of these firms would incur the costs associated with obtaining a listing on the New York Stock Exchange because they believed that such a listing would broaden the market for their stocks and lead to higher prices. Some very successful new firms associated with the information technology revolution of the 1990s Microsoft, Cisco, Dell, Intel were exceptions to this pattern they chose not to obtain a listing on the New York Stock Exchange because they believed that trading stocks electronically in the over-the-counter market was superior to trading stocks by the open-outcry method used on the New...

Perfect Market for Technical Analysis

The FX market is the perfect market for technical analysis. Long-term movements in the currency market generally correlate with economic cycles Economic cycles tend to repeat themselves and therefore can be predicted with a fair degree of accuracy Repetition is the key to technical analysis, since the entire premise of technical analysis lies in using historical price movement to forecast future price movement. In the stock market, the fundamentals of a particular company can change radically in a short period of time, making historical prices irrelevant in the prediction of future movement Technical analysis, which relies strongly on statistical assessments of market conditions, benefits greatly from the fact that the FX market is more normalized - meaning it is less skewed - than other financial markets The equities and futures markets, which are more skewed than the FX market, offer less statistical reliability their distribution is less normalized, and hence the market is not as...

Beyond Technical Analysis

The usual advice for technical traders is a collection of rules with many exceptions and exceptions to the exceptions. The trading rules are difficult to test and the observations are hard to quantify. I want you to go beyond technical analysis by converting an art form into a concrete trading system, and then focusing on implementing the system to the best of your ability. Trading is analysis in action. Thus, this book is an attempt to bridge the gap between the development and the implementation of a trading system.

Why technical analysis

To be sure, there is price manipulation on occasion and temporary fluctuations in markets due to a whole host of factors. But in the end, the price is the price, and analyzing its movements is the surest approach to timing short-term trades. Even those investors keen on using company fundamentals to pick stocks will (or should) admit, they will time their purchases and sales better when using technical analysis and technical trading software. John Bollinger - the deviser of Bollinger Bands, a well-known technical trading technique - was asked recently what the biggest fundamental change was in technical analysis. His reply was that it was the impact of computers. He recalled that when he came in to the business in the late 1970s, technical analysis was still largely done by hand. Pencil, paper and perhaps a calculator were all they had. The big deal then was to have a HP 31C programmable calculator to allow an analyst to automate some of the operations, but it was primarily a business...

Making Technical Analysis Part of Your Candlestick Charting Strategy

A stunning amount of mathematical ingenuity is applied to security trading analysis. The options for technical analysis can be as simple as the average of a few days of closing prices and as complex as applying calculus to price action to indicate the momentum of prices. The possibilities are endless, and you shouldn't be shy about including some of them in your trading strategy alongside candlestick charts. I explore several different types of technical indicators in Chapter 11 and clue you in on a few ways that you can combine these indicators with candlestick patterns in Part IV (Chapters 11 through 15). Find a few technical indicators that match up to the type of trading you want to pursue and add them to your candlestick charts. Read up on the choices, and if Chapter 11 isn't enough, you can always turn to Technical Analysis For Dummies (Wiley) by Barbara Rockefeller. The added understanding of technical indicators can really aid you in your candlestick charting efforts.

Stock Market Opportunities

Several investment vehicles are available to foreign portfolio investors wanting to gain exposure to China. There are both closed-end and open-end mutual funds that invest primarily in the equity of companies whose principal business is based in China or the greater China region. These funds can be purchased either on the stock exchange or from mutual fund companies. Currently, many investors are pouring money into China private equity or venture capital funds. These funds typically make investments in companies in China that have not yet listed their shares on any exchange. Although this is potentially a high return possibility, investors should be aware of some degree of illiquidity and lack of transparency. Other than those funds, investors may consider purchasing stocks of Chinese companies in Chinese domestic market (A shares and B shares) or outside in Hong Kong, London, or New York. A unique feature of China's stock markets is that companies may issue A shares and B shares. A...

Modeling Of Stock Price Diffusion

Crete movement of a stock price over time through the diffusion equation, which combines the average return m and the volatility measured by the standard deviation o. where A is the difference operator (AS ASt St - St-At), S is the stock price, At is the time duration, and z is N(0,1) variable. Note that AS S is the relative change in the stock price, and the relative changes times 100 is the percentage change. Equation (1.4.1) seeks to explain how relative changes are diffused as the time passes around their average, subject to random variation. The diffusion equation (1.4.1) has two parts the first part of the percentage change is the average return m per time period (or drift), multiplied by the number of time periods that have elapsed the second part is the random component that measures the extent to which the return can deviate from the average. Also we see that the standard deviation is increased by the square root of the time change. The root term arises because it can be...

NYSE stocks in the level 2 window

I highlighted the NYSE quotes in this example. The NYSE quotes are almost always the most important since the major market participants use the NYSE for executions. Other market participants here include BOST (Boston stock exchange) or PHIL Philadelphia stock exchange. NYSE stocks on Island

Reits Versus Preferred Stocks

Now let's take a look at how well REITs stack up against preferred stocks. Unlike bonds, preferred stocks do not represent the promise of the issuer to repay a specific amount at a specified date in the future, and in the legal pecking order their claims against the corporation are below those of every other creditor. Unless the terms of the preferred stock provide for the right of the holder to demand redemption, preferred shares have certain disadvantages They do not have a fixed maturity date, nor are their holders considered creditors. And they have little or no capital appreciation prospects. They do, however, provide relatively high yields during most market environments, many offering as much as 7 percent. niHI REITs are not as interest-rate sensitive as bonds, preferred stocks, or utilities. The problem here is, as with bonds, what you see is what you get pure yield and very little else. While the high dividends are enticing, preferred stocks, unlike REITs and common stocks,...

Contrarian View Of The Future Of The Us Stock Market

Since the 1930s, the United States has gone from a country in major crisis, mired in a deep depression, about to enter into a world war, with an undeveloped stock market compared to the more established European markets, to becoming the biggest economy in the world, the biggest stock market in the world, and having a currency so strong it has overtaken gold as the world standard. The United States went from a country on the financial brink to the only superpower on earth I don't believe we should rely on future good times in the stock market to gain back devastating losses to our portfolios during bear market years.

Fundamental Versus Technical Analysis

Chapter 1 of Jack Schwager's book Fundamental Analysis is entitled The Great Fundamental versus Technical Analysis Debate.8 In that chapter Schwager defines fundamental analysis as analysis involving the use of economic data (e.g., production, consumption, disposable income) to forecast prices. He defines technical analysis as analysis based primarily on the study of patterns in the price data itself (and perhaps volume and open interest data). The popularity of these differing approaches has evolved over time. In the early 1970s, most serious financial analysts regarded technical analysis with disdain. But as the decade wore on, the huge price trends that developed in the commodities markets were highly favorable for trend-following techniques. Technical analysis was ideally suited to capture these movements, and this approach became the order of the day. By the late 1980s, technical analysis was the dominant approach for making trading decisions. However, nothing lasts forever, and...

What Does the Current Stock Price Tell the Market

Current stock price indicates the amount that the marginal investor, given supply and demand considerations, is willing to pay to acquire a share of a particular stock. In the short run, this price may or may not have anything to do with the true long-term value of a company. The current price may be heavily influenced by a very temporary supply-and-demand imbalance or by the stock market's reaction to the receipt of new information. On Monday, May 4, faced with a tremendous increase in demand, the stock opened at 84.87 a jump of over 72 six times the closing stock price on the previous trading day. ENMD closed at 51.87, down 33 from its opening price. ENMD's trading volume on May 4 was 23,432,500 shares an increase from the 19,100 shares traded on May 1. On December 31, 2002, ENMD closed at 0.86 per share.

The Shift To Technical Analysis

Technical analysis has been around for as long as there have been organized markets in the form of exchanges. But the trading community didn't accept technical analysis as a viable tool for making money until the late 1970s or early 1980s. Here's what the technical analyst knew that it took the mainstream market community generations to catch on to. A finite number of traders participate in the markets on any given day, week, or month. Many of these traders do the same lands of things over and over in their attempt to make money. In other words, individuals develop behavior patterns, and a group of individuals, interacting with one another on a consistent basis, form collective behavior patterns. These behavior patterns are observable and quantifiable, and they repeat themselves with statistical reliability. Technical analysis is a method that organizes this collective behavior into identifiable patterns that can give a clear indication of when there is a greater probability of one...

Is Technical Analysis or Fundamental Analysis Better

Technical versus fundamental analysis is a longtime battle, and after many years there is still no winner or loser. Most traders abide by technical analysis because it does not require as many hours of study. Technical analysts can follow many currencies at one time. Fundamental analysts, in contrast, tend to specialize due to the overwhelming amount of data in the market. Technical analysis works well because the currency market tends to develop strong trends. Once technical analysis is mastered, it can be applied with equal ease to any time frame or currency traded. However, it is important to take into consideration both strategies, as fundamentals can trigger technical movements such as breakouts or trend reversals, while technical analysis can explain moves that fundamentals cannot, especially in quiet markets, such as resistance in trends. For example, as you can see in Figure 3.4, in the days leading up to September 11, 2001, USD JPY had just broken out of a triangle formation...

Characteristics of Common Stock

The two most important characteristics of common stock as an investment are its residual claim and limited liability features. 2 A corporation sometimes issues two classes of common stock, one bearing the right to vote, the other not. Because of its restricted rights, the nonvoting stock might sell for a lower price. Figure 2.10 Stock market listings. NEW YORK STOCK EXCHANGE COMPOSITE TRANSACTIONS

Stock Market Listings

Figure 2.10 is a partial listing from The Wall Street Journal of stocks traded on the New York Stock Exchange. The NYSE is one of several markets in which investors may buy or sell shares of stock. We will examine these markets in detail in Chapter 3. The P E ratio, or price-earnings ratio, is the ratio of the current stock price to last year's earnings per share. The P E ratio tells us how much stock purchasers must pay per dollar of

Technical Analysis Indicators

Getting into more complicated technical analysis, we will begin to look at indicators as an additional way of examining the present stock price, while deciphering historical price movements. Each of the indicators in this chapter can be applied to individual stocks, while also being used in conjunction with actual pairs. However, not all technical analysis programs offer the ability to track spreads or apply indicators to either a differential or ratio. Therefore, later in the book we will discuss how to build indicators in Excel. What's more, in Appendix II you will find a list of technical analysis programs that are pairs friendly, with a brief description of each.

Understand the psychology of selecting stocks

You only go to parties when you've just made a sweet deal in the stock market. If you couldn't tell others of your shrewd stock picks and your latest killing in the market, there'd be little point to owning securities. While the thought has, hopefully, never crossed your mind of sending copies of a brokerage statement out to friends and relatives, you've been known on more than a few occasions to offer unsolicited stock tips and investment advice.

LOS 44f Describe and account for the relative popularity of the various capital budgeting methods and explain the

The Relationship Between NPV and Stock Price Since the NPV method is a direct measure of the expected change in firm value from undertaking a capital project, it is also the criterion most related to stock prices. In theory, a positive NPV project should cause a proportionate increase in a company's stock price. Example Relationship Between NPV and Stock Price Presstech is investing 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is 750 million. Presstech currently has 100 million shares outstanding, with a current market price of 45 per share. Assuming that this project is new information and is independent of other expectations about the company, calculate the effect of the new equipment on the value of the company and the effect on Presstech's stock price. The stock price should increase from 45.00 per share to 47.50 per share as a result of the project. In reality, the impact of a project on the company's...

Technical Analysis Momentum

Much of the market is also weaned on technical analysis. This can include anything from simple chart reading to more complex derivations of stochastics and moving average lines. Although some believe in them and some don't, the point to these analyses is that enough people do buy and sell decisions based on them. Therefore, because of mass psychology, it is important to have a basic understanding of the continued underlying reasons for market momentum.

Organization And Operation Of The Stock Exchange

The keystone of the structure of speculation is the stock exchange. The New York Stock Exchange as being by far the most important merits a detailed study. To begin with it is an unincorporated organization. The governors of the New York Stock Exchange have been successful in their efforts to maintain prescribed standards of integrity among its members. Membership in the exchange is a very valuable privilege, which in boom times is eagerly sought after. The membership having reached the limit, entrance can be secured now only through the purchase of the scat of a deceased or insolvent member or of some one about to retire from business. The word scat is a misnomer. In early days the brokers had scats in a room arranged like the ordinary legislative chamber, but at the present time the

Technical Analysis Is Still An

Technical analysis looks at the technicals of a share, currency, or market that is, the charting patterns and technical indicators made up from movements in the actual price of that market to form an opinion about historical and future price trends. The movements of forces about the battlefield are subject to certain technical limitations, just as they have always been. Battle is a timeless art and one that has always been governed by technique. Fortunately, on the battlefield of financial markets there is a precise art that is an invaluable framework for understanding how fast forces can shift and to what extent their power has been expended or reestablished. Even the best-laid plans for battle, which have incorporated a superior understanding of the majority of forces arrayed, can go awry if some basic principles and understanding of some of the forces at work within the battle have been excluded. One can enter the fight and experience totally unexpected twists and turns it is...

Stock Prices Move as a Group

One concept that all analysts agree on is that stock prices tend to move as a group. Dow Average, Standard & Poor's, and Nasdaq (over-the-counter) stocks tend to move as a group. If they diverge from moving as a group, it is a signal of weakness in the stock market. The tendency of stock prices moving as a group is what makes up a trend. Divergences are changes in trend that show stocks not moving as a group. It is difficult to know whether the signal means a change in trend or the appearance of a secondary trend. However, the divergence is a technical signal of market weakness. There are also times when divergence occurs and the stock market ignores a divergence signal and continues to move upward. The investor who is aware of trends has the advantage of knowing whether the market is strong and in what direction it is going. First the divergence signal, then the reaction, followed by a turn in direction.

Few Words On Technical Analysis

Another approach to exchange rates is the use of technical analysis, which is discussed in detail in Chapter 20, Technical Analysis. In the very short term, technical analysis methods, such as moving averages, give a good indication of supply and demand pressures in a market. Charts and associated techniques can thus provide useful information. To some extent charts can become self-fulfilling prophecies. If market participants are using similar techniques they will react in the same way at the same time and this will produce the expected movement. The use of chart patterns to make predictions into the future is perhaps more problematic. Essentially chartists are saying that history repeats itself. A similar belief underlies econometric models. Those who look at currencies from a fundamental perspective would argue that, while charts are useful in the short term, they cannot deal with longer-term developments such as changes in fiscal policy. The counter-argument is that time is made...

Is Technical Analysis Informative

Although there have been many tests of technical analysis over the years, most of these tests have focused on the profitability of technical trading rules.9 Although some of these studies do find that technical indicators can generate statistically significant trading profits, but they beg the question of whether or not such profits are merely the equilibrium rents that accrue to investors willing to bear the risks associated with such strategies. Without specifying a fully articulated dynamic general equilibrium asset-pricing model, it is impossible to determine the economic source of trading profits. Instead, we propose a more fundamental test in this section, one that attempts to gauge the information content in the technical patterns of Section II.A by comparing the unconditional empirical distribution of returns with the corresponding conditional empirical distribution, conditioned on the occurrence of a technical pattern. If technical patterns are informative, conditioning on...

Classical Theory Technical Analysis

The underlying assumptions of technical analysis are as follows What many technical analysts do not fully appreciate, or appreciate at all, is that it is the difference between reality and consensus fundamentals that gives major market movements their power. The emotional swings that are so often given status by technical analysts actually occur only around what is a fundamental price shift or trend. It is this fundamental force constantly in the background, and usually very consistent in power, that is at the heart of any trend. However, despite failing to recognize the significance of the real fundamentals, technical analysis provides the clearest measure of immediate emotional bias and has been shown to deliver excellent overall forecasting performance. My own view of technical analysis and markets in general is slightly different from textbook theories. I believe all the various theories are essentially describing similar phenomena. Whatever school or schools of thought analysts...

TABLE 319 Mean Annual Returns of International Stocks Grouped by Market Capitalization 19861996

The authors' next step was to examine how value and growth stocks performed while controlling for size. This step involved constructing 16 different value growth and size portfolios (4X4 16) and investigating the interaction between these two fundamental factors. They found that international value stocks outperformed international growth stocks except when market capitalization was very small. For portfolio managers, these findings suggest that value stocks offered investors relatively more favorable returns than did growth stocks in international markets during the specific time period studied.

Risk Aversion Bottom Fishing Boosts Japanese Stocks and the

The year 1999 witnessed the simultaneous recoveries of East Asian and Russian economies following the market crisis of 1997-1998, and the continued boom into the equity markets of industrialized economies. Global fund managers exhibited a high degree of risk aversion from the emerging markets of Asia, Eastern Europe, and Latin America, opting to capitalize on higher growth in more developed economies. The Japanese yen was the highest-performing currency of 1999 as Japan offered the combination of industrialized economy status and cheap valuation, as the country was widely expected to finally recover from its decade-long economic slump. The buy-the-Japanese-dip strategy mobilized massive flows of funds into Japanese equities, propping up the yen across the board. While the introduction of the euro to currency trading replaced the national currencies of 11 European nations, U.S. equity markets were busy absorbing foreign flows chasing an increasingly solid bull market in high-growth...

Using Classical Technical Analysis

Rather than concentrating on individual technical methodologies, warrior traders see through the array of technical theories to a deeper truth. As I will describe here, there are processes that give rise to repetitive patterns of behavior in our markets. Warrior traders do not deviate into a particular obsession with one particular discipline of technical analysis but instead see all the theories as potentially having some value. Ultimately, warrior traders know they must choose the theory that works best for On the battlefield, there is no time for hesitation. Hesitation can mean defeat. It must all flow as one action and reaction must become an organic and synchronous exercise. Our fundamental understanding, our technical analysis weapons, and our conclusive instinct must unite in a timeless and artful fashion to deliver winning blows in a steady stream of success. What the various theories of technical analysis have in common, and what is essential to successful battle, is the...

The Theory Of Technical Analysis Versus The Reality

Technical analysis is the study of the price action of a market. It is an art of observation from which a great many useful things can be derived. In order to determine a market's overall direction, and the potential extent of future movements in price, past behavior of the price action of that market can be an insightful guide although, as already discussed, it is important to remember that the sum of information taken from technical analysis can only be historical and is not predictive by nature. To the warrior trader, this knowledge of the dual reality of markets that is, the history-future that is unfolding in real time is an invaluable and essential element in winning the trading battles and thus the profit war. The study of technical analysis works, then, to fine-tune the warrior's instincts with regard to the next movement of the market however, this form of study also highlights the distinctions between the different disciplines of battle and the varying weapons required....

Models of the Greatest Stock Market Winners 19531993

Now that you've previewed C-A-N S-L-I-M and know when to sell and cut a loss or nail down a profit, I should mention that a number of the models of Greatest Stock Market Winners, 1953 1993 we actually recommended or bought. Have you ever heard the saying those who can, do, and those who can't, either teach or write Well, we did the work, produced the results and now, afterwards, have put it down in writing to, we hope, help you.

Common Stock Theory of Investment

The research demonstrating the superiority of stocks became known as the Common Stock Theory of Investment. 16 Smith himself was careful to not overstate his findings. He wrote Over a period of yeaOh e principal value of w ell-diversified holding common stocks of representativcorporations in ssentiaindustries tends to increase in accordance with the operation of compound interest . . . Such stock holding may be relied open a term 0f yearSo pay an average income return on such increasing values of something more than the average current rate on commercial paper.17 Yet Chelcie C. Bosland, a professor of economics at Brown University in the 1930s, claimed that the common stock theory was often misused to justify any investment in stocks no matter what the price. Bosland stated The purchase of common stocks after 1922 was more likely to result in profit than in loss. Even though this was largely a cyclical up-swing, many believed that it was a vindication of the theory that common stocks...

Looking to Stock Exchanges for Answers

Before you invest in stocks, you need to be completely familiar with the basics of stock investing. At its most fundamental, stock investing is about using your money to buy a piece of a company that will give you value in the form of appreciation or income. Fortunately, many resources are available to help you find out about stock investing. Some of my favorite places are the stock exchanges themselves. Stock exchanges are organized marketplaces for the buying and selling of stocks (and other securities). The New York Stock Exchange (NYSE), the premier stock exchange, provides a framework for stock buyers and sellers to make their transactions. The NYSE makes money not only from a piece of every transaction but also from fees (such as listing fees) charged to companies and brokers that are members of its exchanges. The main exchanges for most stock investors are the NYSE and the American Stock Exchange (AMEX). Nasdaq is technically not an exchange but it is a formal market that...

Growth Stocks in Distress An Opportunity

In contrast to other value funds, David likes to invest in growth stocks, but priced at value. We seek to buy blue-chip stocks with solidly proven earnings growth we don't want just cheap stock, we want growth, he stresses. This means companies that are growing ahead of the S&P 500, and we want financial strength. Additionally, we prefer strong cash flow. Another category of overreaction is crisis investing, which David defines as extreme overreaction. The market's reaction to the horrifying events of September 11 is one example. When it happened, investors thought people would completely stop flying, so all travel-related stocks were pummeled. At the time, David was a buyer of casino stocks, such as Harrah's. The casino stocks got hit hard, but with their strong financial conditions and an extreme overreaction in the marketplace, we were able to buy casino stocks at very cheap levels. Within several months, David's casino positions had already doubled in price. 1962 Stock Market...

The London Stock Exchange

The London Stock Exchange is conveniently located between the world's two largest financial markets, those of the United States and Japan. The trading day in London overlaps with Tokyo in the morning and with New York in the afternoon. Trading arrangements on the London Stock Exchange resemble those on Nasdaq. Competing dealers who wish to make a market in a stock enter bid and asked prices into the Stock Exchange Automated Quotations (SEAQ) computer system. Market orders can then be matched against those quotes. However, negotiation among institutional traders results in more trades being executed inside the published quotes than is true of Nasdaq. As in the United States, security firms are allowed to act both as dealers and as brokerage firms, that is, both making a market in securities and executing trades for their clients. The London Stock Exchange is attractive to some traders because it offers greater anonymity than U.S. markets, primarily because records of trades are not...

Globalization of Stock Markets

All stock markets have come under increasing pressure in recent years to make international alliances or mergers. Much of this pressure is due to the impact of electronic trading. To a growing extent, traders view the stock market as a computer network that links them to other traders, and there are increasingly fewer limits on the securities around the world in which they can trade. Against this background, it becomes more important for exchanges to provide the cheapest mechanism by which trades can be executed and cleared. This argues for global alliances that can facilitate the nuts and bolts of cross-border trading, and can benefit from economies of scale. Moreover, in the face of competition from electronic networks, established exchanges feel that they eventually need to offer 24-hour global markets. Finally, companies want to be able to go beyond national borders when they wish to raise capital.

Example IBM Preferred Stock

As of April 2001, the depositary shares were trading at 25.4, within a narrow 52-week trading range of 25.00, 26.25 . Using the valuation formula for a consol, the shares trade at an implied yield of 7.38 . The total market capitalization of the IBM-A shares amounts to approximately 260 million. In comparison, the market value of the common stock is 214,602 million, which is more than 800 times larger.

The Amex stock exchange Composite Index

The American Stock Exchange introduced the AMEX Composite Index with a new ticker symbol, XAX, on January 2,1997 it replaced The AMEX Market Value Index (XAM), which, since its introduction in 1973, had been calculated on a total return basis to include the reinvestment of dividends paid by AMEX companies. The XAX is comparable with indexes reflecting only the price appreciation of their respective components. The index covers all of the common stocks listed on the AMEX, as well as warrants and American depository receipts (ADRs).8

The Relationship Between NPV and Stock Price

Since the NPV method is a direct measure ot the expected change in firm value from undertaking a capital project, it is also the criterion most related to stock prices. In theory, a positive NPV project should cause a proportionate increase in a company's stock price. Example Relationship Between NPV and Stock Price Presstech is investing 500 million in new printing equipment. The present value of the future after-tax cash flows resulting from the equipment is 750 million. Presstech currently has 100 million shares outstanding, with a current market price of 45 per share. Assuming that this project is new information and is independent ot other expectations about the company, calculate the effect ot the new equipment on the value ot the company, and the effect on Press tech's stock price. The stock price should increase from 45-00 per share to 47.50 per share as a result of the project. In reality, the impact of a project on the company's stock price is more complicated than the...

Fixed Rate Perpetual Preferred Stock

LOS 4l.h Calculate the value of noncallable fixed-rate perpetual preferred stock given the stocks annual dividend and the discount rate. Example Calculating the value of fixed-rate perpetual preferred stock United Publishing has a fixed-rate perpetual preferred stock outstanding with a dividend of 6 (based on an issue at par of 100). If the investors' required rate of return for holding these shares is 9.5 , calculate the current value of these shares.

International stock market indexes

Within an index strategy, as briefly noted in Chapter 1 the easiest way to obtain an international position is to purchase international index funds. A few countries have more than one index. For example, the London Stock Exchange is represented by several widely followed indexes generally speaking, however, the most commonly followed index is the Financial times-stock Exchange 100, commonly referred to as the FTSE 100 (and pronounced Footsie 100 ). It is based on the shares of the largest 100 UK firms. Germany and Japan each also have more than one major index, but those widely recognized as their primary indexes, respectively, are the Deutscher Aktienindex (DAX), based on the 30 most actively traded shares listed on the Frankfurt Exchange and the Nikkei 225 Stock Average, produced by the Tokyo Stock Exchange. In France, the CAC 40 Index unequivocally is recognized as the indicator of the overall performance of French stocks. Other widely followed indexes include the Hang Seng Index...

Thats a pretty radical prognostication Before you go on with your list of stock selection factors can you explain why

If a stock routinely has daily trading ranges of 20 percent or more, without any substantive news, you know that the market has no idea how to value it. It's all driven by flow of funds, and if the flow of funds into the highest capitalization stocks diminishes, then AOL will certainly suffer disproportionately. It is interesting how rational money managers become in a bear market. Only then do they begin to question the underlying valuations. Okay, continue with your list of stock selection factors.

When did you first get interested in the stock market

I came from a family that never read The Wall SlreetJournal, never bought a share of stock, and never invested in mutual funds. I didn't know anything about the stock market until I was in college. When I attended the University of Arkansas, I took an investment course that sparked my interest. What about the course intrigued you It went down. That's when I learned my first and most important lesson about the stock market Stick to your own beliefs. Did that course clinch your decision to pursue a career in the stock market Yes. After I graduated, I moved to Dallas, which was the onlybig city I had ever visited, to look for ajob as a stockbroker. I thought being a stockbroker meant that you got to manage other people's money and play the stock market all day long. I quickly found out that it was more of a sales job, and quite frankly, I'm a terrible salesperson. I picked up my largest client because his own broker wouldn't answer the phone on the day of the October 1987 stock market...

Technical Analysis Following the Followers

My own prejudices aside, the justification for technical analysis is murky at best. To the extent there is one, it most likely derives from psychology, perhaps in part from the Keynesian idea of conventionally anticipating the conventional response, or perhaps from some as yet unarticulated systemic interactions. Unarticulated is the key word here The quasi-mathematical jargon of technical analysis seldom hangs together as a coherent theory. I'll begin my discussion of it with one of its less plausible manifestations, the so-called Elliott wave theory. Ralph Nelson Elliott famously believed that the market moved in waves that enabled investors to predict the behavior of stocks. Outlining his theory in 1939, Elliott wrote that stock prices move in cycles based upon the Fibonacci numbers (1, 2, 3, 5, 8,13, 21, 34, 59, 93, , each successive number in the sequence being the sum of the two previous ones). Most commonly the market rises in five distinct waves and declines in three distinct...

The Bias Of Common Stock Investors

What discouraged common stock investors from buying REITs The flip side of the coin is that REITs' only business is real estate and stock investors didn't invest in real estate they focused primarily on product or service companies. Real estate was perceived as a different asset class from common stock this problem was particularly acute in the institutional world. Also, for years investors had been told that companies that paid out a high percentage of their income in dividends did not retain much of their earnings and therefore could not grow rapidly. Since, to most common stock investors, growth is the hallmark of successful investing, they didn't want to invest in a company that couldn't grow. Finally, some of the blame for lack of individual investors' interest in REITs can be laid at the feet of stockbrokers.

Getting Tips for Choosing Growth Stocks

Although the information in the previous section can help you shrink your stock choices from thousands of stocks to maybe a few dozen or a few hundred (depending on how well the general stock market is doing), the purpose of this section is to help you cull the so-so growth stocks to unearth the go-go ones. It's time to dig deeper for the biggest potential winners. Keep in mind that you probably won't find a stock to satisfy all the criteria presented here. Just make sure that your selection meets as many criteria as realistically possible. But hey, if you do find a stock that meets all the criteria cited, buy as much as you can When choosing growth stocks, you should consider investing in a company only if it makes a profit and if you understand how it makes that profit and from where it generates sales. Part of your research means looking at the industry (Chapter 12) and economic trends in general.

Stock Market Indexes Pricing and Risk

Stock market indexes are used to compute an average price for groups of stocks. A stock market index attempts to mirror the performance of the group of stocks it represents through the use of one number, the index. Indexes may represent the performance of all stocks in an exchange or a smaller group of stocks, such as an industrial or technological sector of the market. In addition, there are foreign and international indexes. 10.1 Stock Market Indexes In this section we discuss how Dow Jones, Standard and Poor's, NASDAQ, and Value Line calculate their indexes. These indexes depend on stock price, number of shares issued, stock splits, and dividends. However, these are not independent. For example, if a 50 stock with 100 shares issued splits two-for-one, then after the split there are 200 shares, each worth 25. If a 50 stock pays 10 stock dividend (worth 5 a share), then after the dividend the stock is worth 50 1.1 45.45. The oldest and most quoted stock market index is the Dow Jones...

Myth 2 indexing doesnt work in a Stock pickers market

Impact costs in particular are a function of the size of the player's trades. With large stocks, buy or sell orders of tens of thousands of shares are no big deal, but with a small stock it's easy to see the elephants once they are in the vegetable garden. Nimble traders jump in front with small trades (which they turn around and dump on the pachyderms at a profit), and the available supply of willing sellers is exhausted quickly. The larger the fund, the more this phenomenon will occur.

Dont Ignore Lucks Role in Stock Picks

When stock-market investors take a hit, they rail at their stupidity and question their investment strategy. But when lottery ticket buyers lose, they shrug off their bad luck and pony up for another ticket. Sure, if you lose a bundle in the stock market, it could be your fault. But there is a fair chance that the real culprits are bad luck and skewed expectations. If one of your stocks craters, that doesn't necessarily mean you are a fool and that your investment research was inadequate. By the same token, a soaring stock doesn't make you a genius. The fact is, the stock market is pretty darn efficient. When people buy stocks, they think they are playing a game of skill, says Meir Statman, a finance professor at Santa Clara University in California. When the stock goes down rather than up, they think they have lost their knack. But they should take heart. All they have lost is luck. And next time, when the stock goes up, they should remember that that was luck, too. Just as your...

Introduction to Technical Analysis Interpreting Price Action

Technical analysis is the most popular discipline, or school of financial analysis, for trading the foreign exchange markets. Simply put, technical analysis is often defined as the systematic study of price action, which is ultimately derived from the effects of mass market behavior. While fundamental analysis may concern itself with the myriad reasons why price moves, technical analysis is single - mindedly focused on how price moves, and the ways in which that might affect future price movement. Technical analysis consists of a broad methodology through which traders can make all of their most important trading decisions. This includes entries, exits, stop-loss placement, profit target placement, trade-sizing, risk management, and more. When a beginner is first introduced to using technical analysis for analyzing and trading the foreign exchange markets, there are invariably several buzzwords and phrases that are heard most In the actual practice of technical analysis, however,...

Emotions And The Use Of Fundamental Versus Technical Analysis

As discussed, technical analysis is the pure study of the price action itself, and as such, its use is more appropriate when traders are looking to comprehend the emotional swings and roundabouts that all the fundamental forces contribute to but, in anything other than the medium to long term, rarely dominate. While the fundamentals are real and remain the underlying driving force, in the context of daily, weekly, monthly, and even quarterly profit reporting, only technical analysis gives you not only a handle on the forces at work in real time but also a reminder of the truly dominant fundamental force. The term dominant fundamental force is used because this captures what is the greatest weakness of fundamental analysis and the greatest strength of technical analysis. At every point in time, as discussed already, there are both bullish and bearish fundamental arguments and forces at work. As there are no clearly assigned weights to any particular variable, which is the more powerful...

Elliott Wave and Technical Analysis

A full comprehension of the Elliott Wave Theory is impossible without a grounding in the basics of classical technical analysis. In its most basic form, technical analysis is nothing more than the forecasting of price trends based on chart pattern recognition. Since Elliott Wave Theory is also based on pattern recognition, basic technical analysis serves as an excellent complement. Chart patterns form the backbone of technical analysis because they succinctly let the analyst know what Is happening in the market at any given time. Technical analyst Ralph Bloch sums it up nicely (Chart patterns arc either accumulation patterns, continuation patterns, or distribution patterns. 1

The Dollar Versus The Stock Market

It stands to reason since both the dollar and the stock market are influenced by interest rate trends (as well as inflation) that there should be a direct link between the dollar and stocks. The relationship between the dollar and the stock market exists but is often subject to long lead times. A rising dollar will eventually push inflation and interest rates lower, which is bullish for stocks. A falling dollar will eventually push stock prices lower because of the rise in inflation and interest rates. However, it is an oversimplification to say that a rising dollar is always bullish for stocks, and a falling dollar is always bearish for equities. Figure 6.11 shows the dollar dropping from 1985 through 1987, during which time stocks continued to advance. Stocks didn't actually sell off sharply until the second half of 1987, more than two years after the dollar peaked. Going back to the beginning of the decade, the dollar bottomed in 1980, two years before the 1982 bottom in stocks. In...

Smoke And Mirrors Charting And Technical Analysis

In this chapter, we will look at the basis of charting by examining the underlying premise in charting and technical analysis, which is a belief that there are systematic and often irrational patterns in investor behavior and that technical indicators and charts provide advance warning of shifts in investor behavior. While we will not attempt to describe every charting pattern and technical indicator - there are hundreds - we will categorize them based upon the view of human behavior that underlies each. In the process, we will see if there are lessons in charts that even non-believers can take away with them and cautionary notes for true believers about potential inconsistencies.

Pairs Trading Stock Selection

Stock selection in a pairs trading strategy is the most important step of the investment process as well as the step that differentiates this strategy from other market-neutral strategies. During the stock selection process, managers are looking for quantifiable metrics that have strong predictive ability across a wide range of stocks. For most managers, this involves the creation of a multifactor model that can be used to rank all of the stocks in the investment universe. Pairs trading models can be fundamentally or technically driven, but they fall under the special case of mean reversion models. A mean reversion manager will try to buy the stocks that are underpriced relative to the historical average and sell the ones that are overpriced relative to that average. In effect, this type of manager will break his investment universe into several small subsets, The weighting of each factor within the model is based on that factor's estimated predictive value in terms of expected...

Nonlinear Modeling For Technical Analysis

The succession of financial crises over the past two decades such as the stock crash in 1987, the Asian financial crisis in 1997, the Internet bubble collapse in 2000, and more recently the current global financial crisis in 2007 to 2009 has generated widespread market panics and pointed out the weakness of the usual financial analysis and modeling techniques in forecasting the dynamic of financial markets. For example, technical analysis seems to be relevant only in the short term and may not yield good predictions when markets pass through financial turbulences and crises. After briefly discussing the economic justifications of nonlinearity for financial markets, we discuss the appropriate nonlinear models to further test the effectiveness of technical trading rules in turbulent financial markets. Nonlinearity and Stock Market Dynamics Empirically, Gourieroux, Scaillet, and Szafarz (1997) suggest that beside the fact that financial markets are naturally and theoretically...

Investor Expectations Regarding Stock Market Returns

What investment return should an investor expect from a diversified portfolio of common stocks As a proxy for the market, let's use the rate of return associated with the S&P 500 Index and compare its performance with the change in operating earnings per share associated with the stocks that comprise the S&P 500 Index. During the 70-year period from 1928 to 1997, the S&P 500 had a compound average return of 10.6 percent. In more recent years, stock return performance has gone from spectacular to abysmal. Look at Table 3-3. In calendar years 1997, 1998, and 1999, the total returns on the S&P 500 Index were 31 percent, 26.7 percent, and 19.5 percent respectively. But unless the companies are propelled by a similar percentage increase in profits or a general decrease in interest rates, general stock market performance that good can't last forever. It didn't the market turned, the bubble burst, and the stock market has experienced three years of negative numbers. The S&P 500 was down...

LOS 48g Calculate the cost of noncallable nonconvertible preferred stock

The cost of preferred stock (k ) is Example Cost of preferred stock Suppose Dexter has preferred stock that pays an 8 dividend per share and sells for 100 per share. What is Dexter's cost ot preferred stock Note that the equation kps Dps P is just a rearrangement of the preferred stock valuation model P Dps kps, where P is the market price.

Commodities Versus Stocks

Figure 6.14 compares the CRB Index to the Dow Industrial Average from 1985 through the third quarter of 1989. The chart shows that stocks and commodities sometimes move in opposite directions and sometimes move in tandem. Still, some general conclusions can be drawn from this chart (and from longer-range studies), which reveals a rotational rhythm that flows through both markets. A rising CRB Index is eventually bearish for stocks. A falling CRB Index is eventually bullish for stocks. The inflationary impact of rising commodity prices (and rising interest rates) will combine to push stock prices lower (usually toward the end of an economic expansion). The impact of falling commodity prices (and falling interest rates) will eventually begin to push stock prices higher (usually toward the latter part of an economic slowdown). The usual sequence of events between the two markets will look something like this A peak in commodity prices will be followed in time by a bottom in stock prices....

Can Stock Market Forecasters Forecast

The earliest study of which we are aware that pertains to the effectiveness of investment advice is Can Stock Market Forecasters Forecast by Alfred Cowles 3 rd, which appeared in 1933. The findings of this work are prescient of the efficient markets view of investment returns, which would become widely popular decades thereafter. The initial section of the work addresses the stock selection success of 20 fire insurance companies and 16 financial services. The second part deals with the stock market forecasting skills of 25 financial publications. In Cowles' investigation of the common stock investments of 20 leading fire insurance companies, the author explains that these companies have a lengthy history of investing compared to both financial services and to investment companies, which are of relatively recent origin. Because the insurance companies' average portfolio turnover is only about 5 a year, the analysis is confined to the actual purchases and sales during the examination...

Methodtechnical Analysis

This chapter on technical analysis shows how one trader goes about analyzing markets. Use it as a model for choosing your favorite tools, rather than following it slavishly. Test any method you like on your own data because only personal testing will convert information into knowledge and make these methods your own. Many concepts in this book are illustrated with charts. I selected them from a broad range of markets stocks as well as futures. Technical analysis is a universal language, even though the accents differ. You can apply what you've learned from the chart of IBM to silver or Japanese yen. I trade mostly in the United States, but have used the same methods in Germany, Russia, Singapore, and Australia. Knowing the language of technical analysis enables you to read any market in the world.

How Are Expectations of Growth Factored into Stock Prices

Many investors don't understand how expectations of future corporate performance are reflected in the current price of a stock. Suppose DEF Growth Company announces that quarterly revenue and earnings have increased by 10 percent and DEF's stock price immediately declines by 25 percent. Why would this happen Easy If stock market analysts and institutional investors are expecting earnings or revenue growth for momentum stocks of 30 percent per year, those expectations are already factored into today's stock market price especially for growth stocks. Any performance that does not meet or exceed those growth expectations usually results in a sizeable drop in the stock's price. Growth stocks are companies whose rate of revenue or earnings growth (15 percent and up) greatly exceeds the growth rate of the economy as a whole (3 percent to 5 percent). If earnings growth for the stock meets market expectations, all other things equal, the stock return should be approximately equal to the...

2. The Current Stock Price Of Mcd Is 89.00. The Current Dividend For Mcd Is 2.50 And Dividends Are Expected To Grow At

The current stock price of MCD is 89.00. The current dividend for MCD is 2.50, and dividends are expected to grow at a constant rate of 8 . The required return for MCD is closest to 6. Restoration Software is a growth stock that has never paid a dividend. What phase of the life cycle is Aerosail most likely in, and which dividend discount model is most appropriate to value the company's common stock Phase Model

The Foundations of Technical Analysis

It is best to let technical analysts provide the basis for their approach in their own words. Magee in his classic book on technical analysis made the following argument It is If we were to summarize the assumptions that underlie technical analysis, we would list the following (3) Disregarding minor fluctuations in the market, stock prices tend to move in trends that why they occur, can be detected sooner or later in the action of the market itself. This is at the core of technical analysis. Charts, the believers argue, send advance warning of shifts in demand and supply in the form of price and volume patterns. The views of technical analysts are best described by another quote from Magee The market price reflects not only the differing fears and guesses and moods, rational and irrational, of hundreds of potential buyers and sellers, but it also reflects their needs and resources- in total, factors which defy analysis and for which no statistics are obtainable. These are nevertheless...

Only 3 to 5 Percent Maximum in the Stock Market

I asked this adviser to the superrich what percentage of the family office's assets were invested in the stock market. Why Because when you have that much money, neither the risk nor the volatility of the stock market is worth the gamble. Not now. Not ever. These people are at the End Game. They no longer have to play, and wouldn't think of it

Technical Analysis Measures used to Recognize Swing Trading Patterns

To begin with, we typically restrict our selections to stocks that are at least 12 in price, having an average (20 day) daily volume of at least 500,000 shares. Since market makers can more easily manipulate low price, low volume stocks, we stay away from them. Our most successful pattern recognition formulas are available to all visitors (free of charge) at www.mrswing.com in the SwingLab section of the web site. You can copy the formulas into SwingTracker and scan all listed stocks at any time These are the same formulas that provide the MasterSwings recommendations. The formulas will be built into the next version of SwingTracker.

Technical Analysis Of Spreads

Most technical analysis of intramarket spreads (e.g., March-December T-bonds) is represented as variations or distortions from the normal price relationship. In this method of trading, the distortions are also called overbought and oversold conditions and the strategic approach taken is countertrend. By subtracting the deferred price from the nearby (e.g., December from March of the same year) over the life of the contract for many years, the investor can measure the historic patterns (see Figure 13-8). These spread relationships will vary in a manner that allows the trader to set objectives. When March is trading 1 2 points over December, the spread can be sold when March trades under December by 1M points, the spread can be bought.

Stock Market Volatility

Table 13-6 compares the RiskMetrics volatility forecasts for a group of 31 stock markets. The selected indices are those most recognized in each market, for example the S&P 500 in the US, Nikkei 225 in Japan, and FTSE-100 in Britain. Most of these have an associated futures contract, so positions can be taken in cash markets or, equivalently, in futures. Nearly all of these indices are weighted by market capitalization. Stock Market

The New York stock exchange

The relatively recent addition of ETF products to the New York Stock Exchange could further enhance their appeal. The NYSE appears to have recognized that by opening its floor to ETF products, it will become part of a growing business, and by the same token further enhance the global liquidity of its listed companies, many of which happen to be the components of the standard baskets of these ETFs.

Timing the Trade with Technical Analysis

The question in every trader's mind is Just when and where should I pull the trigger Technical analysis supplies the tools for answering that question, but there is no single answer. There is no single technical indicator that can be exclusively relied on to produce winning outcomes, because the markets are too complex. No one, to date, has produced a consistently reliable technical trading system for any market, let alone forex. This is because technical indicators can never capture all of the variables that influence price movements. Financial mathematicians, known as quants, try to come up with algorithms (equations) that improve predictive ability, and they get millions of dollars to try. They've tried every conceivable methodology, such as Fourier analysis, wavelets, and neural networks, to try to gain even the smallest increment of predictive value. Yet none can replace the seasoned experienced trader. The reason should be obvious technical analysis provides a snapshot of market...

Determinants of Success at Charting and Technical Analysis

Can you succeed with technical indicators and charts The answer that has been long given by academics and fundamentals is no, but that answer may need to be reassessed in light of the research on price patterns (especially price momentum) and trading volume in recent years. There seems to be enough evidence now for us to conclude that it is foolhardy to ignore recent price movements and changes in trading volume when investing in a stock. So what are the essential ingredients for success with technical analysis These seem to be a few

Stock Market Indicators

Stock market indicators have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question, How did the market do today Thus, stock market indicators (indexes or averages) have become a part of everyday life. Even though many of the stock market indicators are used interchangeably, it is important to realize that each indicator applies to, and measures, a different facet of the stock market. The most commonly quoted stock market indicator is the Dow Jones Industrial Average (DJIA). Other popular stock market indicators cited in the financial press are the Standard & Poor's 500 Composite (S&P 500), the New York Stock Exchange Composite Index (NYSE Composite), the NASDAQ Composite Index, and the Value Line Composite Average (VLCA). There are a myriad of other stock market indicators such as the Wilshire stock indexes and the Russell stock indexes, which are followed primarily by institutional...

Model of the Behavior of Stock Prices

In this chapter we derive a continuous-variable, continuous-time stochastic process for stock prices. An understanding of this process is the first step to understanding the pricing of options and other more complicated derivative securities. It should be pointed out that in practice we do not observe stock prices following continuous-variable, continuous-time processes. Stock prices are restricted to discrete values (usually multiples of and changes can be observed only when the exchange is open. Nevertheless, the continuous-variable, continuous-time process proves to be a useful model for most purposes.

Sources of Dollar Risk in International Stocks Exchange Rate Risk

Table 9-3 analyzes the stock market risk (measured as the standard deviation) for dollar investors in foreign stocks over the period from January 1970 through December 1996. The local risk is the risk calculated It is very important to note that the total risk of holding foreign equities is substantially less than the sum of the local and exchange risks. This is because these risks are not perfectly correlated, so movements in the exchange rate and the local stock market frequently offset each other. In fact, for some countries, such as the United Kingdom, the exchange risk offsets the local risk so much that a U.S. holder of British equities since 1970 has experienced less volatility in dollar returns than a British investor does in pounds sterling

Diversification to Foreign Stocks Optimal Allocation for Foreign Equities

It might surprise investors that the principal reason for investing in foreign stocks is not that their expected return is better than in the U.S. (although Figure 9-3 shows the risk-return trade-offs for investing in U.S. and foreign equities for dollar-based investors. These are based on the historical returns to these assets over the past 27 years, during which foreign returns did slightly outpace U.S. returns. A minimum risk occurs with 25 percent allocated to foreign stocks, although portfolio theory suggests that investors should increase the foreign allocation to 38.9 percent, called the efficient portfolio, if foreign returns higher than those in the past also hold in the future. holding periods of ten or more years. In any case, multiple-year analysis involving U.S. and foreign stocks is unlikely to change the allocation appreciably since mean reversion of equity returns prevails in foreign stock markets as well as the U.S. Even if foreign returns are not expected to exceed...

The Process For Stock Prices

It is tempting to suggest that a stock price follows a generalized Wiener process that is, that it has a constant expected drift rate and a constant variance rate. However, this model fails to capture a key aspect of stock prices. This is that the expected percentage return required by investors from a stock is independent of the stock's price. If investors require a 14 percent per annum expected return when the stock price is 10, then, ceteris paribus, they will also require a 14 percent per annum expected return, when it is 50. Clearly, the constant expected drift-rate assumption is inappropriate and needs to be replaced by the assumption that the expected drift, expressed as a proportion of the stock price, is constant. The latter implies that if S is the stock price, the expected drift rate in S is S for some constant parameter, p Thus, in a short interval of time, At, the expected increase in S is pS At. The parameter, x, is the expected rate of return on the stock, expressed in...

The Fundamentals Of Technical Analysis

Technical analysis is appointed to analyze market movement (the movement of prices, volumes and open interests) using the information obtained for a past time. Mainly, it is the chart study of past behavior of currencies prices in order to forecast their future performance. It is one of the most significant tools available for the forecasting of financial markets. Such analysis has been an increasingly utilized forecasting tool over the last two centuries. The main strength of technical analysis is the flexibility with regard to the underlying instrument, regarding the markets and regarding the time frame. A trader who deals several currencies but specializes in one may easily apply the same technical expertise to trading another currency. A trader who specializes in spot trading can make a smooth transition to dealing currency futures by using chart studies, because the same technical principles apply over and over again, regardless of the market. Finally, different players have...

Chinese Stock Markets

We now take a closer look at stock market trends to see how the results of the Shanghai and Shenzhen exchanges compare to New York markets. While it is beyond the scope of this chapter, data comparison of Chinese markets with European markets, as well as other emerging markets in general and those in the region in particular would reveal what commonalities and anomalies characterize the Chinese situation. In analysing the stock market trends, we are struck by similarities with Japan in the 1980s. Like Japan in the late 1980s, China is booming and accumulating huge US dollar reserves because of the trade surplus. It is a population of savers. Yet, the motivations of Chinese savers differ from the Japanese. This also reflects the changing nature of the resource and production chain. It is now even easier to outsource aspects of production. Like Japanese, China needs to import vast amounts of energy and commodities. The study of anomalies and other aspects of the Chinese markets is just...

Emphasizing Financial Stocks

Exposure to the stock market in favor of bonds and emphasizes financial stocks, which would benefit in a low-rate environment. Ms. Cohen, conversely, maintains a healthy exposure to the stock market and emphasizes not just finan-cials, but also economically sensitive stocks such as autos and housing-related stocks. She further expects to emphasize later-cyclical commodity stocks as the year unfolds and the economic pace quickens. James Weiss, deputy chief investment officer for growth equities at State Street in Boston, and David Shulman, chief strategist at Salomon Brothers, concur with much of Mr. Clough's analysis of the economy. Mr. Weiss says the recent uptick in cyclical stocks should be mostly ignored, and he favors steadier growth in defensive sectors like health care and beverages.

Using Technical Analysis

Investors have a wide range of choices with respect to technical analysis. They can use the charts and complex ratios of the technical analysts. Or they can, more informally, use technical analysis just to get a general sense of the market. In the latter case, market behavior itself is not as important as the implications such behavior can have on the price performance of a particular stock. Thus technical analysis might be used in conjunction with fundamental analysis to determine when to add a particular stock to one's portfolio. Some investors and professional money managers, in fact, look at the technical side of a stock before doing any fundamental analysis. If the stock is found to be technically sound, then they'll look at its fundamentals if not, they'll look for another stock. For these investors, the concerns of technical analysis are still the same Do the technical factors indicate that this might be a good stock to buy Most investors rely on published sources, such as...

Comparison of Two Growth Stocks

Some investors buy stocks while others sell because they anticipate the future in different ways. Some sell because when they look a few months ahead they see a possible recession coming. Others, looking farther ahead, buy because they believe that the price of the stock already discounts a possible recession. They are anticipating the business recovery, and the vast growth of revenues and earning power that they see in some companies. The chart illustrates the turnaround that began in 1962 when new management assumed control of the company. The arrow points to the superperformance price phase. The earnings of the company have been sensitive to business cycles, resulting in volatile stock-price performance. Chart by Securities Research Company

Us And Japanese Stock Markets

Figure 8.11 through 8.15 provide a comparison of the American market (utilizing the Dow Jones Industrial Average) and the Japanese market (utilizing the Nikkei 225 Stock Average). The fit between these two markets isn't as tight as that between the American and British markets. Still, there's no question that they have an impact on one another. Figure 8.11 demonstrates the global bull market from 1985 through 1989 as reflected in the world's two largest stock markets. Japanese Stocks (Nikkei 225) Japanese Stocks (Nikkei 225)

Estimating The Returns On The Chinese Stock Markets Ipos Ownership And Returns

As the Chinese stock exchanges are young and most shares were IPOs of mature state owned firms (many listed Chinese IPOs were companies near bankruptcy in desperate need of cash injections), one would expect different return patterns than in developed markets. Due to the need to attract investors, some firms are likely to state their assets in a misleading way. The public offerings are a way to increase the amount of capital within the system, allowing more promising firms to subsidize weaker ones.

Example 52 One Period Stock Price Movement as a Bernoulli Random Variable

Suppose we describe stock price movement in the following way. Stock price today is S. Next period stock price can move up or down. The probability of an up move is p, and the probability of a down move is 1 - p. Thus, stock price is a Bernoulli random variable with probability of success (an up move) equal to p. When the stock moves up, ending price is uS, with u equal to 1 plus the rate of return if the stock moves up. For example, if the stock earns 0.01 or 1 percent on an up move, u 1.01. When the stock moves down, ending price is dS, with d equal to 1 plus the rate of return if the stock moves down. For example, if the stock earns -0.01 or -1 percent on a down move, d 0.99. Figure 5-1 shows a diagram of this model of stock price dynamics. FIGURE 5-1 One-Period Stock Price as a Bernoulli Random Variable End-of-Period Stock Price FIGURE 5-1 One-Period Stock Price as a Bernoulli Random Variable End-of-Period Stock Price We will continue with the above example later. In the model of...

How Can One Participate In This China Boom Period Chinese and New York Stock Exchanges

Having discussed the effects of IPOs on stock returns, we will now look more broadly at the Chinese stock exchanges by comparing the Shanghai and New York stock exchange and the Hang Seng. In so doing, we draw on Chow and Lawler (2003) who studied the relationship between the rates of return and volatilities of the Shanghai and New York markets. They found that the overall rates of returns and volatility in the two markets were basically uncorrelated. They use a absolute deviation volatility measure as well as variance to measure volatility. The almost zero and insignificant correlation between the rates of return to Shanghai and New York stocks indicates that the two markets are not integrated. We would be surprised to discover that the Shanghai stock exchange would be directly correlated with NY because it is a very different sort of market. First, China is an emerging market rather than a stable world economic leader. Second, the countries and markets responded to the Asian...

Managing Risk in Volatile Stocks

To look for the maximum play for your buck, while still managing your risks, you cannot get involved with every volatile name possible. Some experienced traders prefer to trade no more than one NASDAQ stock at a time. Be careful about wanting to shoot the whole wad, says one. If you get caught in one of these volatile stocks that jump rapidly, you're dead. You shouldn't be in them. You are better off sticking to Microsoft or Compaq markets for two points' profit. There's nothing better than liquidity. Buy two hundred thousand and make two hundred thousand dollars. Stay patient and get your trade.

The Fundamental Tool Technical Analysis

We know that it may seem strange to refer to technical analysis as a fundamental tool, but this is where you can bridge the gap between fundamental and technical analysis. Technical analysis is the study of charts illustrating the movements of the Forex market. But technical analysis itself does not move the Forex market. Fundamentals move the market. So when you really get down to it, technical analysis is the study of how fundamentals move the Forex market. While it does not affect the supply or demand for any particular currency, technical analysis tells us when the supply or demand is changing and how it will most likely affect the exchange rate between two currencies. Knowing this, you can take advantage of the subsequent movements. You will run across many pieces of breaking news where you have no idea how the news is going to affect the Forex market. We all do. When this happens, all we can do is wait to see how the majority of Forex investors is going to react to the news....

Stock Selection for the Defensive Investor

It is time to turn to some broader applications of the techniques of security analysis. Since we have already described in general terms the investment policies recommended for our two categories of investors,* it would be logical for us now to indicate how security analysis comes into play in order to implement these policies. The defensive investor who follows our suggestions will purchase only high-grade bonds plus a diversified list of leading common stocks. He is to make sure that the price at which he bought the latter is not unduly high as judged by applicable standards. t As we have discussed in the commentaries on Chapters 5 and 9, today's defensive investor can achieve this goal simply by buying a low-cost index fund, ideally one that tracks the return of the total U.S. stock market. purchase, to make sure that he obtains (1) a minimum of quality in the past performance and current financial position of the company, and also (2) a minimum of quantity in terms of earnings and...

The Importance of Earnings in Stock Market Analysis

While the equity market is sensitive to major economic reports and the activities of the Fed and the Treasury, it is also strongly influenced by corporate earnings news. Stock market performance is frequently expressed in terms of price to earnings (P E) ratios. If a stock's price rises faster than its current or projected earnings, investors may become concerned that the P E ratio is too high and the stock is overvalued.

The New York Stock Exchange the specialist system

Historically, equities have traded on the New York Stock Exchange (NYSE), the NASDAQ marketplace or the American Stock Exchange. The NYSE has typically attracted the largest blue-chip companies in America and has successfully expanded its listings to include such large foreign companies as Nokia and DaimlerChrysler. The NYSE is constantly rumored to be chasing after Microsoft (currently listed on NASDAQ) and has even reserved the ticker symbol M if Bill Gates ever has a change of heart.

The Strongest Signal in Technical Analysis

Divergences between MACD-Histogram and prices occur only a few times a year in any given market, but they give some of the most powerful messages in technical analysis. These divergences identify major turning points and give extra-strength buy or sell signals. They do not occur at every important top and bottom, but when you see one, you know that a major reversal is probably at hand.

Modeling Stock Market Prices

In his doctoral thesis 2 written in 1900, Bachelier laid the groundwork for the study of stock market pricing. A discussion of different approaches is given in 6 . Much of the material in this and the next section follows arguments developed in 23 . We now discuss the pricing of options. Because the price of an option depends, in large part, on the price of the underlying stock, we first discuss the pricing of stocks, which in turn depends on how stock market prices are modeled. The BINOMIAL MODEL of stock prices is a discrete model. We assume that a stock trades during a fixed time interval 0,T , and we divide the interval into n equally spaced subintervals The model is the following If the stock price is S(tj) at time tj, then we assume that it may increase to price Su (tj+i) with probability P (tj) at time tj+i or decrease to price SD(tj+i) with probability 1-P(tj).ii We also assume that the price changes S(ti) - S(to), S(t2) - S(ti), , S(tn) - S(tn-i) are independent. Then at each...

Trading Stocks with MTPredictor

However, when you move to the stock market, and in particular individual stocks, then you will find that individual stocks en masse will move in the same direction as the overall market. I do appreciate that this is a generalisation, and individual stocks can, and often do, move against the main market but generally, most stocks will move with the main market. As such, I hope you can all see that it makes sense to orientate your trading on individual stocks to be in tune with the main market. The question I would like to ask here is how would this have affected your scans of US stocks on any individual day

Technical Analysis Tools

Technical analysis tools help you identify market sentiment what the Forex market is doing and why. As Forex investors watch the markets, they begin to form opinions about what is happening, and these opinions ultimately drive their trading decisions. And as they do so, their trading decisions are reflected in the price movement of the currency pairs. There are only two general market sentiments that you need to focus on in your trading bearish and bullish. You are probably familiar with these two terms from the stock market, but in the Forex market, they carry slightly different connotations. In the stock market, bullish has a positive connotation because it means that the market is going up, and bearish has a negative connotation because it means that the market is going down. This is not the case in the Forex market. When a currency pair is going up on the chart in the Forex market, all it means is the first currency in the pair the base currency is becoming more valuable than the...

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