Day 1 Security Analysis Moving Average Example IBM Stock Price closing value IBM 3 day moving value 1 Fundamental Analysis 90 what we did earlier divs P E etc 2 Technical Analysis 10 because less credible now is very short term oriented what should be bought and sold focuses on HISTORICAL STOCK PRICES to predict FUTURE STOCK PRICES most common technique for technical MOVING AVERAGES Day 1 200 2 201 3 202 4 203 5 201 201 202 202 1st specifiy time period 2nd pick stock 3rd compute rolling avg over most recent 3 days usually 50 100 and 200 4th graph stock price as well as moving average over time 5th look at relationship between price and moving average AFTER contact Key 2 curves cross BUY OR SELL P below MA SELL P above MA BUY BS AB MA is like a threshold If hit and stock price sell sign of weakness If hit and stock price and bounces off trampoline sign of strength so buy Or in tramp terms If cant get through trampoline and falls down sell If plow through threshold buy IT DOES NOT MATTER WHICH STARTS ON TOP Issues with Moving Average Does Moving average work No only about the time As change time period 50 100 changes intersection Head and Shoulder Analysis offensive lineman Peterson thinks crazy investopedia likes Thinks stock go down now so sell buy if on head no evidence saying it works Efficient Market Hypothesis 1 Weak Form stock prices CANNOT be used to predict future stock prices True technical analysis is not viable False technical analysis could work Note SILENT about funadamental 2 Semi Strong Form ALL publicly available info includes fund analysis CANNOT be used to predict future stock prices raises standards from weak form If True encompasses weak form and weak form is also T Note Doesn t say stock doesnt do crazy stuff just can t predict ahead of time Strong Form all info public OR private CANNOT be used to predict future stock prices if T so are weak and SS if F avoid laws and make shit ton IF T stock market knows everything snd you cant win and it is completely efficient CAN T BE TRUE 1 Weak Form2 Semi Strong Form Strong Form Hypotheses in the negative Closer look at Semi Strong Form SS true would say stocks fairly valued insert graph Instaneously adjusts and levels off No opportunity to trade No undervalues or overvalued with fair return can t learn info can try to react to it buy have no chance can t anticipate Sometimes good bad things happen but randomly can t predict and act on quick enough NO opportunity to beat market SS False still have time to buy while undervalued pops up but not all the way works way up and then levels off market is sluggish here takes while to get where supposed to be gives opportunity to trade getting more than fair rate of return for risk you bear TA technical analysis FA fundamental II inside info All forms false TA works FA works II works Weak true Other False TA does NOT work FA works II works SS true Strong False Strong form True ALL true TA does NOT work FA does NOT work II works TA does NOT work FA does NOT work II does NOT work All forms falseWeak trueOther FalseSS trueStrong FalseStrong form True ALL true We can look at empirical evidence because regardless of type of world individuals wouldn t pick same stocks because different risk levels and diversification Next 2 days covers empirical tests of SS form Day 2 Examine effect of changes in epectations in model used in fund analysis aka PI d 1 r d 1 r 2 Day 3 Examine performances received of users of fundamental analysis Day 2 focus publicly available info BEYOND stock prices Empirical Test of the Semi Strong Form I Examine the effect of changes in expectations in model used in fund analysis Pi d1 1 r d2 1 r 2 d3 E3 P E 3 1 r 3 1 Earnings announcement surprises 2 Dividend announcement surprises most credible analysts change must be surprise After announcement day next EPS announcement abnormal return of 2 25 then next quarter 9 then 6 WORTH PURSUING almost doubling what s normal also signals earnings are likely to be higher so raises intrinsic value Announcement period initiation abnormal return 3 4 next day through year 1 10 Omissions are 7 and 12 5 ABOUT SAME STRENGTH AS EARNINGS ANNOUNC WORTH PURSUING 3 Stock split announcements 2 for 1 stock split means if you own 100 you will get 200 mechanical aspect price SHOULD be of original BUT when announce price goes UP Because desirable trading range 20 60 thus more appealing to investors price too low is bad though because what s wrong with it If a co is willing to split that means they are CONFIDENT stock price won t drop from this level Net wealth gainer for investors Abnormal return about 11 WORTH DOING almost doubling normal rate of return Strong case that semi strong is FALSE 4 Management earnings forecast revisions If mgmt thinks earnings go up intrinsic value goes up Positive revisions casue ab 3 over 1 mo Negativve 1 SSF 5 Stock broker analyst earnings forecast revisions 10 revision causes ab 1 5 20 causes ab 3 same as 4 ALL OVER 1 MONTH SSF 10 causes 1 5 20 causes 3 Things to CONTROL for when tracking the stock price 1 Market returns 2 Beta Ex Say market up 3 cuz world peace Netflix up 2 cuz earnings announcement Wouldn t look so great Say market up 2 Netflix up 3 NOT FAIR to say 1 is because of earning announcement because if Netflix beta 2 then when market is up 2 Netflix should be at 4 instead of 3 Now underperforming by 1 insert graph If favorable to earnings announcenement would be above line Line of best fit represents what normally happens aka what stock would do with market The Line NORMAL RETURN we keep track of abnormal regression line becomes BENCHMARK Will get announcement date surge whether SS T or F Summary each of the 5 things test for SS form Day 3 second approach of empirical test of the SS form note cap capitalization market value price shares outstanding size II Examine the Performance record of users of fundamental analysis 1 Mutual Funds a avg mutual fund underperforms the market b No funds consistently beat market year after year c Funds underperform benchmark of peer similar stocks SS TRUE 2 Hedge Funds high risk high roller private club high fees a 2 20 will take 2 of your net asset value and take 20 of your gains each YEAR omg b After adjusting for risks and fees 1980 2008 match market 2009 2014 underperform market Info using ISNT working SS TRUE c 3 Private Equity rich bitches too but buys concentrated things resurrects companies and sells back off HIGH risk Romney a After adjusting for risks and