End Term Project

TECHNICAL AND FUNDAMENTAL ANALYSIS OF SECURITIES

END TERM PROJECT

“TECHNICAL AND FUNDAMENTAL ANALYSIS OF SELECTED SECURITIES OF INDIAN STOCK MARKET”

In partial fulfillment for the requirement of the MBA Programme

SUBMITTED BY

Under the guidance of :

S.No.

TITLE

Pg.No.

1. CH 1 Introduction

6 1.1 Rationale

8 1.2 Objectives

8 1.3 Research Methodology

CH 2 TECHNICAL ANALYSIS A CONCEPTUAL OVERVIEW

2.1 DOW THEORY

2.2 ELLIOT WAVES BASICS

2.3 MOVING AVERAGE

CH 3 FUNDAMENTAL ANALYSIS A CONCEPTUAL OVERVIEW

3.1 Economic Analysis

3.2 Industry Analysis

3.3 Company Analysis

3.3.1 The Management

3.3.2 The Company

3.3.3 The Annual Report

3.3.4 Ratios

3.3.5 Cash Flow

CH 4 Analysis

CH 5 Limitations

CH 6 Conclusion

Glossary

References and Bibliography

CHAPTER- 1

INTRODUCTION

1.1 INTRODUCTION

Investing, like marriage, isn't something that should be entered into lightly. You wouldn't get married on a first date, would you? Ok, maybe some of us would, but that's not really very Foolish. Before we marry... er, I mean invest in a company, there are more than a few things we need to know about it.

Securities Analysis

An analysis of securities and the organization and operation of their markets. The determination of the risk reward structure of equity and debt securities and their valuation. Special emphasis on common stocks. Other topics include options, mutual fluids and technical analysis.

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action which take into account price of instruments, volume of trading and, where applicable, open interest in the instruments.

Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument.

Main differences between the two types of analysis:

Fundamental analysis / Technical analysis
Focuses on what ought to happen in a market / Focuses on what actually happens in a market
Factors involved in price analysis:
1. Supply and demand
2. Seasonal cycles
3. Weather
4. Government policy / Charts are based on market action involving:
1. Price
2. Volume
3. Open interest (futures only)

1.2 RATIONALE FOR THE STUDY

In an industry plagued with skepticism and a stock market increasingly difficult to predict and contend with, if one looks hard enough there may still be a genuine aid for the Day Trader and Short Term Investor.

The price of a security represents a consensus. It is the price at which one person agrees to buy and another agrees to sell. The price at which an investor is willing to buy or sell depends primarily on his expectations. If he expects the security's price to rise, he will buy it; if the investor expects the price to fall, he will sell it. These simple statements are the cause of a major challenge in forecasting security prices, because they refer to human expectations. As we all know firsthand, humans expectations are neither easily quantifiable nor predictable.

If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove

Fundamental analysis and technical analysis can co-exist in peace and complement each other. Since all the investors in the stock market want to make the maximum profits possible, they just cannot afford to ignore either fundamental or technical analysis.

1.3 OBJECTIVES OF THE STUDY

Primary Objective:

a)To do technical and fundamental analysis of chosen securities

Sub-Objectives:

a) to study the various theories of technical analysis and fundamental analysis

b) understand the movement and performance of stocks

c) understanding and analyzing the factors that affect the movement of stock prices in the Indian Stock Markets

1.4 RESEARCH METHODOLOGY & DESIGN

TYPE OF STUDY

The research has been based on secondary data analysis. The study has been exploratory as it aims at examining the secondary data for analyzing the previous researches that have been done in the area of technical and fundamental analysis of stocks. The knowledge thus gained from this preliminary study forms the basis for the further detailed Descriptive research. In the exploratory study, the various technical indicators that are important for analyzing stock were actually identified and important ones short listed.

SAMPLE DESIGN

The sample of the stocks for the purpose of collecting secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen.

SAMPLE SIZE

The sample size for the number of stocks is taken as 10 for technical analysis and 4 for fundamental analysis of stocks as fundamental analysis is very exhaustive and requires detailed study.

CHAPTER- 2

TECHNICAL ANALYSIS

A CONCEPTUAL OVERVIEW

TECHNICAL ANALYSIS:

Technical analysis can be conditionally divided into some main parts such as:

Types of charts
Graphical methods
Analytical methods
Technical indicators

Technical analysis is concerned with predicting future price trends from historical price and volume data. The underlying axiom of technical analysis is that all fundamentals (including expectations) are factored into the market and are reflected in exchange rates.

A technical analysis is based on three axioms:

Movement of the market considers everything
Movement of prices is purposeful
History repeats itself

SUPPORT AND RESISTANCE

Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.

Resistance, on the other hand, is the point at which sellers (bears) take control of prices and prevent them from rising higher. The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations.

Support levels indicate the price where the most of investors believe that prices will move higher. Resistance levels indicate the price at which the most of investors feel prices will move lower.

Role Reversal

When a resistance level is successfully broken through, that level becomes a support level. Similarly, when a support level is successfully broken through, that level becomes a resistance level.

3.1 DOW THEORY– TRENDS:

The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical analysis. The Dow theory is a method of interpreting and signaling changes in the stock market direction based on the monitoring of the Dow Jones Industrial and Transportation Averages. Dow created the Industrial Average, of top blue chip stocks, and a second average of top railroad stocks (now the Transport Average). He believed that the behavior of the averages reflected the hopes and fears of the entire market.The behavior patterns that he observed apply to markets throughout the world.

Three Movements

Markets fluctuate in more than one time frame at the same time:

Nothing is more certain than that the market has three well defined movements which fit into each other.

The first is the daily variation due to local causes and the balance of buying and selling at that particular time.
The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days.
The third move is the great swing covering from four to six years.

Bull markets are broad upward movements of the market that may last several years, interrupted by secondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements are referred to as the primary trend.
Secondary movements normally retrace from one third to two thirds of the primary trend since the previous secondary movement.
Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad market movements.

Various cycles have subsequently been identified within these broad categories.

Primary Movements have Three Phases

The general conditions in the market:

Bull markets

Bull markets commence with reviving confidence as business conditions improve.
Prices rise as the market responds to improved earnings
Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear markets

Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.
Prices decline in response to disappointing earnings.
Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Ranging Markets

A secondary reaction may take the form of a ‘line’ which may endure for several weeks. Price fluctuates within a narrow range of about five per cent.

Breakouts from a range can occur in either direction.

Advances above the upper limit of the line signal accumulation and higher prices;
Declines below the lower limit indicate distribution and lower prices;
Volume is used to confirm price breakouts.

Trends

Bull Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point of the previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

Successive higher highs and higher lows.

The start of an up trend is signaled when price makes a higher low (trough), followed by a rally above the previous high (peak):
Start = higher Low + break above previous High.
The end is signaled by a lower high (peak), followed by a decline below the previous low (trough):
End = lower High + break below previous Low.

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

Large Corrections

A large correction occurs when price falls below the previous low (during a bull trend) or where price rises above the previous high (in a bear trend).

A bull trend starts when price rallies above the previous high,
A bull trend ends when price declines below the previous low,
A bear trend starts at the end of a bull trend (and vice versa).

3.2 ELLIOT WAVES THEORY BASICS

TRENDLINES

Breaking through support or resistance levels results in a change of traders’ expectations (which causes supply/demand lines to shift).

An Uptrend is defined by successively higher low-prices. A rising trend can be thought of as a rising support level: the bulls are in control and are pushing prices higher. A Downtrend is defined by successively lower high-prices. A falling trend can be thought of as a falling resistance level: the bears are in control and are pushing prices lower.

3.3 MOVING AVERAGES

Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the average price of a financial instrument over a given time.

The moving average represents the consensus of investor’s expectations over the indicated period of time.

The classic interpretation of a moving average is to use it in observing changes in prices. Investors typically buy when the price of an instrument rises above its moving average and sell when the it falls below its moving average.

TECHNICAL INDICATORS

There is a vast number of elaborated technical indicators:

Moving Average –MA
Relative Strength Index — RSI :The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100. When Wilder introduced the Relative Strength Index, he recommended using a 14-day RSI.. Since then, the 9-day and 25-day Relative Strength Index indicators have also gained popularity.
ADVANCE/DECLINE LINE: The “advance/decline line” shows, for some period, the cumulative difference between advancing and declining issues.
CLOSING TICK: “Closing tick” is the difference between the number of shares that closed on an uptick and those that closed on a downtick.
CLOSING ARMS: “Closing arms” or “trin” (trading index) is the ratio of average trading volume in declining issues to average trading volume in advancing issues.
Z-BLOCK TRADES: “zBlock trades” are trades in excess of 10,000 shares.
HI-LO-CLOSE CHART: A hi-lo-close chart is a bar chart showing, for each day, the high price, low price, and closing price.
CANDLESTICK CHART: A candlestick chart is an extended version of the hi-lo-close chart. It plots the high, low, open, and closing prices, and also shows whether the closing price was above or below the opening price.
POINT AND FIGURE CHARTS: Point-and-figure charts are a way of showing only major price moves and their direction. A “major” up move is marked with an “X,” while a “major” down move is marked with an “O.” A new column starts every time there is a change in direction
HEAD AND SHOULDERS FORMATION: Once a chart is drawn, analysts examine it for various formations or pattern types in an attempt to predict stock price or market direction in the case of head-and-shoulders formation. When the stock price “pierces the neckline” after the right shoulder is finished, it’s time to sell.
ODD-LOT: The “odd-lot” indicator looks at whether odd-lot purchases are up or down. HEMLINE: Followers of the “hemline” indicator claim that hemlines tend to rise in good times.
SUPER BOWL: The Super Bowl indicator forecasts the direction of the market based on whether the National Football Conference or the American Football Conference wins. A win by the National Football Conference is bullish.
BETA: Beta is a risk measure comparing the volatility of a stock's price movement to the general market.
MOMENTUM: Momentum measures the speed of price change and provides a leading indicator of changes in trend.
UPSIDE/DOWNSIDE: Measures of Upside/Downside separate the volumes for rising markets from those in falling markets. Since volume is independent of price, it makes a valuable tool for measuring the quality of a price trend.

CHAPTER- 3

FUNDAMENTAL ANALYSIS

A CONCEPTUAL OVERVIEW

Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and societal factors (to name just a few elements) within a business cycle framework.

I. ECONOMIC ANALYSIS:

POLITICO-ECONOMIC ANALYSIS:

No industry or company can exist in isolation. It may have splendid managers and a tremendous product. However, its sales and its costs are affected by factors, some of which are beyond its control - the world economy, price inflation, taxes and a host of others. It is important, therefore, to have an appreciation of the politico-economic factors that affect an industry and a company.

The political equation

A stable political environment is necessary for steady, balanced growth. If a country is ruled by a stable government which takes decisions for the long-term development of the country, industry and companies will prosper.

Foreign Exchange Reserves

A country needs foreign exchange reserves to meet its commitments, pay for its imports and service foreign debts.

Foreign Exchange Risk

This is a real risk and one must be cognizant of the effect of a revaluation or devaluation of the currency either in the home country or in the country the company deals in.

Restrictive Practices

Restrictive practices or cartels imposed by countries can affect companies and industries.

crystallizing the exposure.

Foreign Debt and the Balance of Trade

Foreign debt, especially if it is very large, can be a tremendous burden on an economy. India pays around $ 5 billion a year in principal repayments and interest payments.

Inflation

Inflation has an enormous effect in the economy. Within the country it erodes purchasing power. As a consequence, demand falls. If the rate of inflation in the country from which a company imports is high then the cost of production in that country will automatically go up.

The Threat of Nationalization

The threat of nationalization is a real threat in many countries – the fear that a company may become nationalized.

Interest Rates

A low interest rate stimulates investment and industry. Conversely, high interest rates result in higher cost of production and lower consumption.

Taxation

The level of taxation in a country has a direct effect on the economy. If tax rates are low, people have more disposable income.

Government Policy

Government policy has a direct impact on the economy. A government that is perceived to be proindustry will attract investment.

THE ECONOMIC CYCLE:

It affects investment decisions, employment, demand and the profitability of companies.

The four stages of an economic cycle are:

Depression

Recovery

Boom

Recession

Depression

At the time of depression, demand is low and falling. Inflation is high and so are interest rates. Companies, crippled by high borrowing and falling sales, are forced to curtail production, close down plants built at times of higher demand, and let workers go.

Recovery

During this phase, the economy begins to recover. Investment begins anew and the demand grows. Companies begin to post profits. Conspicuous spending begins once again.

Boom

In the boom phase, demand reaches an all time high. Investment is also high. Interest rates are low. Gradually as time goes on, supply begins to exceed the demand. Prices that had been rising begin to stabilize and even fall. There is an increase in demand. Then as the boom period matures prices begin to rise again.