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Chapter 13 Fundamental and Technical Analysis - Coggle Diagram

- - - - include macroeconomic factors: economic outlook for Canada's trading partners, and industrial factors(e.g. the growth stage of a particular industry)
      - most important factor: the actual or expected profitability of the issuer ( whether a company can properly service its debt and pay current dividends)
  - - - a method of determining the future price direction of a security based on past price movements. ”
      - “look for recurring patterns that allow them to predict future stock price movements.”
  - - - Assumptions : “Profit-seeking investors in the marketplace react quickly to the release of information. When new information about a stock appears, investors reassess the intrinsic value of the stock and adjust their estimation of its price accordingly.”
      - Conclusion: “A stock’s price fully reflects all available information and represents the best estimate of the stock’s true value”
      - Three variations:
        
        Weak: “all past market information is fully reflected in current prices. With this form, technical analysis is considered to have little or no value”
        
        Semi-strong: “all publicly available information is fully reflected in current prices. With this form, both fundamental analysis and technical analysis have little or no value.”
        
        Strong: “ all information is fully reflected in current prices, including both publicly available and insider information. In other words, no single investor has information that provides an advantage over any other investor.”
      - Investor
        
        believe in the hypothesis : (particularly the strong form), favour a passive investment approach; follow buy-and-hold strategy or invest in market indexes and exchange-traded funds
        
        reject: use a more active approach; involves more buying and selling in an attempt to beat the stock market's average returns
    - - Assumptions:
        
        “New information concerning a stock is disseminated randomly over time. Price changes are therefore random and bear no relation to previous prices.
      - Conclusion
        
        “Past price changes contain no useful information because any developments affecting the company have already been reflected in the current price of the stock.”
    - - Assumptions: “People are rational and have access to all necessary information. People use information intelligently in their own self-interests and make intelligent decisions after weighing all available information.”
      - “Past mistakes can be avoided by using available information to anticipate change.”
    - - New information is not available to everyone at the same time
      - Investors do not react in the same way at the same time
      - not everyone can make accurate forecasts and correct valuation decisions
      - mass investor phychology and greed may at times cause investors to act irrationally
- - - - increase sale and personal tax levels, people have more disposable income, which curtails spending (vice versa)
      - higher tax: corporation reduce the amount can pay out in dividends or spend on expansion;
      - factors limit the effectiveness: 1. the lengthy time lag required to get parliamentary approval for tax legislation; 2. the time fiscal action is taken and the time the action affects the economy
    - - increase spending stimulate the economy
      - target certain sectors of the economy: e.g. tax incentives to stimulate growth in housing or investment in technology industries
      - achieve government policy goals: e.g. the dividend tax credit and the exemption from tax of a portion of capital gains
      - savings by individuals are encouraged through measures such as registered retirement saving plans and tax-free savings accounts
    - - high levels of government debt would restrict both fiscal and monetary policy options
  - - - economic growth accelerate: inflation rise; the Bank raises short-term interest rates to slow economic growth;
      - Short-term interest rates rise, bond yields increase slows down;
        
        rise in short- term rates continues, economic growth usually slows; Long-term bond prices begin to stabilize and briefly fall below those of equities
        
        suddenly, each short-term interest rate increase, long-term bond yields fall
      - “A decline in long-term rates reduces competition between equities and bonds. On the other hand, higher real bond yields over time increase the degree of competition between bonds and equities and slowly undermine equity markets.
      - “When the Bank raises short-term rates to slow the rate of economic growth, a fall in long-term bond yields may result. This effect signals that investors approve of the degree of economic slowing. When short-term yields rise and long-term yields fall, the change in the yield curve is called a tilting of the yield curve.”
    - - inflation leads to higher interest rates, lower corporate profits, and lower price-earnings multiples
      - An inverse relationship exists between the rate of inflation and a corporation's price-earnings multiples.
        when inflation rises, the value of future cash flows paid by the corporation will fall.
        therefore, if inflation is rising, an investor is more likely to pay a lower price for the earnings (P/E)
- - - - Automobile and Components
      - Consumer Durables and Apparel
      - Consumer services
      - Retailing
    - - Food and Staples retailing
      - Food, beverage and tobacco
      - Household and personal products
    - - Banks
      - Diversified Financials
      - Insurance
    - - health care equipment and services; pharmaceuticals, biotechnology, and life sciences
    - - capital goods
      - commercial and professional services
      - transportation
  - - - e.g. software and hardware development in the computer industry
      - unprofitable at first, future prospects may be promising; large start-up investment may even lead to negative cash flow
      - “New industries are continually developing to provide products and services”
    - - “sales and earnings are consistently expanding at a faster rate than in most other industries. ”
      - A growth company (growth stocks)
        
        above-average rate of earnings on invested capital over a period of several years
        
        “continue to achieve similar or better earnings on additional invested capital”
        
        “show increasing sales in terms of both dollars and units, coupled with a firm control of costs.”
      - do not pay out large dividends , because growth is financed through retained earnings;
        exhibit high price-to-earnings ratios and low dividend yields
      - “If the marketplace expects that future growth in a specific growth industry will not meet expectations, growth companies within that industry are likely to have an above average risk of a price decline.”
    - - “experience slower, more stable growth in sales and earnings that more closely matches the overall rate of economic growth. ”
      - earnings and cash flow tend to be positive
      - difficult to identify differences in products between companies in same industry;
        Therefore, “price competition increases, profit margins usually fall, and some companies expand into new businesses with better growth prospects.”
      - during recessions, stable growth companies usually demonstrate a decline in earnings that is less than that of the average company;
        mature stage: have sufficient financial resources to weather difficult economic conditions
    - - “produce products for which demand has declined because of changes in technology, an inability to compete on price, or changes in consumer tastes.”
      - “Cash flow may be large, because there is no need to invest in new plant and equipment. At the same time, profits may be low.”
  - - - the ease of entry for new competitors to that industry
      - “Companies choose to enter an industry depending on the amount of capital required, opportunities to achieve economies of scale, the existence of established distribution channels, regulatory factors and product differences.”
      - economies of scale: 规模经济
    - - the degree of competition between existing firms
      - “This factor depends on the number of competitors, their relative strength, the rate of industry growth, and the “extent to which products are unique (rather than simply ordinary commodities)”
    - - potential pressure from substitute products
      - “Other industries may produce similar products that compete with the industry’s products.”
    - - “The degree of influence depends largely on buyers’ sensitivity to price.”
    - - the costs of suppliers' raw materials or inputs affect profit margins or product quality
  - - - sensitive to swings economic condition
      - “Most cyclical S&P/TSX Composite Index companies are large international exporters of commodities such as lumber, base metals (e.g., copper and nickel), or oil. These industries are sensitive to global economic conditions, swings in the prices of international commodities markets, and changes in the level of the Canadian dollar. ”
      - three main groups
        
        “Commodity basic cyclical, such as forest products, base metals, and chemicals
        
        • Industrial cyclical, such as transportation, capital goods, and basic industries (steel and building materials)”
        
        “• Consumer cyclical, such as merchandising and automobile industries”
      - the energy and gold industries are also cyclical
      - “The rate of expansion or contraction in the U.S. business cycle tends to significantly influence the profitability of cyclical Canadian companies”
        exchange rates are an important secondary factor
        
        most cyclical industries benefit from a declining Canadian dollar because their exportable products become cheaper for international buyers
    - - stable earnings and continues dividend payments; demonstrate relative stability in poor economic conditions
      - blue-chip: “shares of top investment-quality companies, which maintain earnings and dividends through good times and bad.”
      - Many investors consider shares of the major Canadian banks to be blue-chip industries; however, bank stock prices are typically sensitive to changes in interest rates. As
      - the shares of utility companies: (gas, water, electricity) are defensive
    - - industries in which risk and uncertainty are unusually high because analysts lack definitive information ;
      - Emerging industries are speculative
      - “speculative can also describe any company, even a large one, whose shares are treated as speculative. ”
        e.g. “shares of growth companies can be bid up to high multiples of estimated earnings per share as investors anticipate continuing exceptional growth. If, for any reason, investors begin to doubt these expectations, the price of the stock will fall. In such cases, investors are speculating on the likelihood of continued future growth that may not materialize.”
      - energy, natural resources exploration, biotechnology, and early-stage technology companies.
- - - - “By studying price action, technicians attempt to measure market sentiment and expectations. In effect, the technical analyst believes that the market itself indicates the direction and the extent of its next price move.”
    - - “Given this assumption, the primary task of a technical analyst is to identify a trend in its early stages and carry positions in that direction until the trend reverses itself.”
    - - “the behaviour of investors tends to repeat itself. Investors tend to fluctuate between pessimism, fear, and panic on one side, and optimism, greed, and euphoria on the other. By comparing current investor behaviour as reflected through market action with comparable historical market behaviour, the analysts attempt to make predictions. Even if history does not repeat itself exactly, we can still learn a lot from the past, they believe.”
  - - - Technical analyst studies the effect of supply and demand, which are reflected in price and volume.
      - Fundamental analyst: studies the causes of price movements
  - - - book 13.5
      - reversal pattern
        
        head-and-shoulder formation
      - continuation pattern
        
        symmetrical triangle
    - - moving average
        
        buy signal
        
        sell signal
    - - Contrarian investors
        
        “Contrarian investors use these indicators to determine what the majority of investors expect prices to do in the future, so that they can move in the opposite direction.”
    - - “Long-term (greater than two years)
      - • Seasonal (one year)
      - • Primary/intermediate (nine to 26 weeks)
      - • Trading (four weeks)”