Technical Analysis Lec2-Investment Managment And Portfolio-Lecture Notes, Study notes of Investment Management and Portfolio Theory

Download Technical Analysis Lec2-Investment Managment And Portfolio-Lecture Notes and more Study notes Investment Management and Portfolio Theory in PDF only on Docsity! y g ( ) Lesson # 9 TECHNICAL ANALYSIS Contd… Technical Indicators: In addition to charts, most technical analysts use a collection of technical indicators. These statistics, either calculated or directly observed, are alleged to have a relationship with the future direction of overall stock market or with an individual security. Some indicators might logically carry useful information; others are sufficiently far-fetched that only the most creative analyst could develop a caused and effect relationship with the market. Indicators with Economic Justification: Some technical indicators are based on economic activity that is measurable and observable. Fundamental analyst also monitor economic data, some economy based on technical indicators receive special attention in the marketplace. Many of these based on logical investment mangers behavior, especially the manager’s likely reaction to prior events.. A few of the most popular technical indicators discussed next. Short Interest: A person who sells stock short believes that the share price will decline. Eventually, they must purchase stock in the open market to replace the shares previously burrowed. The quantity of share sold short at anytime is periodically reported in the financial press and is called short interest. Shares sold short must eventually be the covered (bought). It logically follows that the higher the short interest figure, the larger is the potential demand for shares. The technical analyst believes that a large short interest figure is bullish because of the potential demand for the shares. The short interest ratio is the number of days it would take to cover the short interest if trading continued at the average daily trading volume of the previous month. Short interest can also be used as an aggregate market indicator. An indicator based on the behavior of well-informed group of market participants is called a smart money indicator. A technical indicator that prescribes actions opposing those of the marketplace is a contrary opinion indicator. Conversely, some people believe the small investor usually waits too long to make a decision and consequently makes investment decision that lag optimum behavior. Odd lots are associated with the small investor. If odd-lot short sales begin to rise relative to total odd-lot transactions, it may signal the end of a market downturn and, therefore, be a bullish signal. A technical indicator that prescribes actions opposing those of the marketplace is a contrary opinion indicator. Margin Loans: Another contrary opinion indicator is the margin loan indicator. It measures the extent to which market participants have borrowed money to finance their stock transaction. Increased margin buying is historically associated with rising markets. Margin buying often speaks just before market declines. A technical analyst might view this rising debt as a bearish signal. docsity.com y g ( ) Increased margin buying has historically been associated with rising markets. Mutual Fund Cash Position: Mutual funds hold an enormous quantity of stock in their port folio. As a group, the investment activities of mutual fund managers can have a significant influence on the direction of stock market prices. The mutual fund cash position measures the proportion of total mutual fund assets currently held in cash-equivalent securities. Many fund managers seek to time the market to some extent. In other words, they increase their purchases when they believe conditions favor a market advance, and hold cash when they believe the market is likely to decline. Cash held by mutual funds represent potential demand for stock in much the same way short interest does. Equity fund generally find generally invests most of its assets in common stock, holding cash only temporarily. The logic of this technical indicator is that when the mutual fund industry holds more cash than normal, the potential demand is bullish signal about the future. Similarly, when mutual funds are essentially fully invested, the potential demand is there, having already been satisfied in the marketplace. Some analyst believes that the mutual fund cash position normally ranges between 5 percent and 15 percent. Because of the need to satisfy shares redemption and because of the constant arrival of new investment funds from account holders, a given mutual fund never lets its cash balance get to zero. Five percent or so is an effective minimum in many cases. The upper limit is subjective, as fund manager differ substantially on the percentage of assets they are willing to temporarily remove from the equity market. Mutual fund cash is potential demand for stock. Confidence Index: A confidence index is a ratio of yield on high grade bonds (usually AAA) to yield on a lower grade bonds (usually BBB). Because investors are risk averse, riskier bonds yield more than safer bond, so this ratio will always be less than 1.0. To the advocate of this ratio, the important thing is how close the ratio is to the maximum value 1.0. By definition, a BBB-rated bund carries more default risk than AAA-rated bond. An investor’s willingness to take on more risk is partially determined by the investor’s expectations about the future. Default is probably more likely when the economy is expected to turn down, with the associated reduction in consumer demand and product sales, conversely, a robust economy can help a company generate cash and overcome many of its corporate owes. When the confidence index gets closer to 1.0, investors are more likely to be bullish about the economy, and therefore about corporate earnings. A decline index may foretell an economic downturn. Advance-Decline Line: Every trading day, some issues advances, some declines and some remains unchanged. Advance-Decline Line is a graphical representation of the net advances over a period of time. Advances count as pluses, declines are minuses and unchanged securities count as zero. Relative Strength Ratio: docsity.com