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Amity Business school

Unit 2 ---- part 1
SAPM
akhil Swami

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 syllabus Name of Institution

• Fundamental analysis-Economic &industry

analysis, concept of Business Cycles,
Indicators of economic prosperity, Industry
analysis, Company analysis, Company
valuation.DOW"s Theory, Various
Technical analysis tools like Moving
averages, Volume Analysis, Indicators,
RSI, Patten analysis,Candle sicks,Market
breadth analysis,
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• Trend analysis,Elliot wave

Rules Fibonacci numbers, ROC/RSI,
CAPM and Fama and French challenge,
lagging indicators and leading indicators
analysis, reading and interpretations of
technical patterns and charts,Other tools
to Forecast the market and take Entry and
exit decisions.

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Dows Theory
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• Price discounts all information.

• Price movements are not totally random.
• Investors can identify facts associated with
price movements.
• If the trend analysis give wrong results, it
is the fault of the chartist and not the chart.

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• The market has three movements

• (1) The "main movement", primary movement or major
trend may last from less than a year to several years.
It can be bullish or bearish. (2) The "medium swing",
secondary reaction or intermediate reaction may last
from ten days to three months and generally retraces
from 33% to 66% of the primary price change since
the previous medium swing or start of the main
movement. (3) The "short swing" or minor movement
varies with opinion from hours to a month or more.
The three movements may be simultaneous, for
instance, a daily minor movement in a bearish
secondary reaction in a bullish primary movement.
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• Market trends have three phases

• Dow Theory asserts that major market trends are composed
of three phases: an accumulation phase, a public participation
phase, and a distribution phase. The accumulation phase
(phase 1) is a period when investors "in the know" are actively
buying (selling) stock against the general opinion of the
market. During this phase, the stock price does not change
much because these investors are in the minority absorbing
(releasing) stock that the market at large is supplying
(demanding). Eventually, the market catches on to these
astute investors and a rapid price change occurs (phase 2).
This occurs when trend followers and other technically
oriented investors participate. This phase continues until
rampant speculation occurs. At this point, the astute investors
begin to distribute their holdings to the market (phase 3).
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• Trends are confirmed by volume

• Dow believed that volume confirmed price trends. When
prices move on low volume, there could be many different
explanations why. An overly aggressive seller could be
present for example. But when price movements are
accompanied by high volume, Dow believed this represented
the "true" market view. If many participants are active in a
particular security, and the price moves significantly in one
direction, Dow maintained that this was the direction in which
the market anticipated continued movement. To him, it was a
signal that a trend is developing. However, in IPO, the volume
can be deceptive as has happened in the case of Easter
silicate.
• Trends exist until definitive signals prove that they have
ended
 Investor psychology cycle Name of Institution

• Contempt----bull market starts when

market is at low and investors scorn
stocks.
• Doubt and suspicion---they try to decide
whether what they are left should be
invested in safe heaven such as money
market.
• Caution---most investors are cautious but
prudent investors come in.
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• Confidence---most investors start buying.

• Enthusiasm---prudent investors are out
and bull market comes to an end.
• Greed and conviction---enthusiasm is
followed by greed and IPO come to raise
funds,
• Indifference---selling pressure builds in.
• Dismissal—they dismiss market as
investible class.
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• Fear panic and contempt—cycle restarts.

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 Difference between technical Name of Institution

and fundamental analysis

• Technical analysis predicts short term
price movements whereas fundamental
analysis establishes long term values.
• Focus of technical analysis is mainly on
internal market data, primarily price nad
volume data whereas the focus of
fundamental analysis is on the factors
relating to economy, industry and
company.
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• Speculators , who want to make quick

money , use technical analysis , whereas
investors , who invest on long term basis ,
use the fundamental analysis.

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 Fundamental analysis
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Understanding the Economic Environment

Analyzing the Industry

Assessing the projected performance of

the Company
 Economic Environment
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• Global economic scenario

• Central Government Policy

 Key Variables
 Growth rate of GDP
 Industrial Growth rate,
 Agriculture and Monsoon,
 Savings and investments,
 Price level and inflation,
 Interest rates
 Infrastructure facilities
 Forecasting Techniques Name of Institution

• Anticipatory surveys.
• Leading indicators like
• 1.Average weekly hours of manufacturing production
workers.
• 2.Average weekly initial unemployment claims,
3.Contracts and orders for plant and equipment.
4.Number of new building permits issued,
• 5.Money supply,
• 6 USA/Europe/Asian market indicators.
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• 7.Change in sensitive material prices,

• 8.Change in manufacturers unfilled orders,
• 9 index of consumer expectations.

• Coincidental Indicators----
• 1. Employees on non agricultural pay rolls,
• 2.Index of industrial production,
• 3. Manufacturing and trade sales. .

• Lagging Indicators-----
• 1.Average duration of unemployment ,
• 2.Ratio of manufacturing and trade inventories to sales.
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• 3.Average prime rate,

• 5 Commercial and industrial loan outstanding,
• 6.Change in consumer price index for services.
 Industry analysis
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• Analyze the prospects of each industry

• Difficult to forecast the future

• Consists of 4 parts
– Sensitivity to the business cycle
– Industry life cycle analysis
– Structure and characteristics
– Profit Potential of the industry
 Industry analysis
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• Sensitivity to the business cycle

– Eg: Auto industry vs Pharmaceutical

• Industry life cycle analysis

– What stage of industry eg Start phase, growth
phase, maturity or decline stage

• Structure and characteristics

– Profit Potential of the industry
 Industry analysis
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• Structure and characteristics

– Nature of competition
– Demand Prospects
– Technology and research

• Profit Potential of the industry

– Porter:
– Threat of new entrants,
– Rivalry among existent firms,
– substitute products ,
– bargaining power of buyers and sellers
 Fundamental Analysis
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• To determine the valuation of the share,

the analyst must forecast earnings,
dividend and the appropriate discount rate

• Earnings potential and the risk are linked

to the prospects of the industry and the
developments in the macro economy
 Fundamental Analysis
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• To determine the valuation of the share,

the analyst must forecast earnings,
dividend and the appropriate discount rate

• Earnings potential and the risk are linked

to the prospects of the industry and the
developments in the macro economy
 4 Step Process of analysis
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Strategy analysis

Accounting analysis

Financial analysis

Prospective Analysis (Growth etc)

 Company Analysis
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• Important parameters for analysis

– EPS of the coming years
– And a reasonable earnings multiple, given the
growth prospects, risk exposure and other
characteristics of the firm

• For this we need historical data

– Of Earnings, Growth, Risk and Valuation