TECHNICAL ANALYSIS OF THE STOCK MARKET:
Fundamental analysis attempts to discover underlying strengths and weaknesses in the economy and its component industries and firms. Major problem with this approach is that everyone is using published information- information that is also available to thousands of other investors who are using the same technique to discover undervalued stocks. If they come to similar conclusions regarding particular undervalued securities they would rush to buy
TECHNICAL ANALYSIS OF THE STOCK MARKET:
Any security selection method that does not look at the investment fundamentals. Louis Rukeyser who hosts the popular TV program known as the Wall Street Week on the PBS refers to the technician as the gnomes or cave dwelling technicians who prepare the technical market indicators used on the show.Technicians use three kinds of market indicators, generally
known as, pressure indicators. These include:1. What kind of investors are buying or selling stocks.
2. Indicators that measure market activity.
3. Indicators that reveal market philosophy.
1a. We have to identify smart investors.
1b. We must find information that tells us what the smart investors are upto.
THE ODD-LOT RATIO: Odd-lot purchases/ odd lot sales This ratio assumes that odd-lot traders are unsophisticated with little capital to invest, while round-lot traders are just the opposite. An increase in this ratio shows greater market activity on part of the unsophisticated investors-- something to be avoided.
The three kinds of market indicators, generally known as, pressure indicators, are used to forecast the future direction of the overall market. These include:
1. Who is buying or selling stocks.
a. We have to identify and follow smart investors.
b. We must find information that tells us what the smart investors are buying or selling.
THE ODD-LOT RATIO: Odd-lot sales/odd-lot purchases, odd-lot short sales, insider buying and selling, and institutional investment activity are used to identify the sophisticated investors.
2. Indicators that measure market activity. This indicator presumably gauge buying and selling pressures felt in the overall market.
The Dow Theory: designed to measure market strength by examining the relative performance of the Industrial and the Transportation Averages.
b. Volume and Price-Related Volume: Significant stock price movements are associated with heavy trading volume. Refer to chart.
The Advance/Decline Index: This is the number of issues advancing in price divided by the number of issues declining in price. An upward trend in this index indicates a bullish market.
The New Highs/New Lows Index: This is the number of issues that traded at their highest 52-week price divided by the number of issues that traded at their lowest 52-week price.
3. Indicators that reveal market philosophy. The idea here is that the investor psychology is the dominant force in the market.
a. Barron's Confidence Index: Average Yield of Best Grade Bonds Divided by the Average Yield on Intermediate Grade Bonds. A downward trend indicates diminishing investor confidence.
b. The Slope of the Yield Curve. A steep upward slope forecasts higher interest rates and presumably higher rates of inflation. Rising interest rates are bad omen for stocks.
c. Activity in Low-Priced Stocks: Activity in Low-priced stocks heats up as the bull market comes to an end.