Stock Market Analysis

By H. Crowell

The return that a stock can provide is often predicted with the help of technical analysis. Stock market trading tips are based on technical analysis of various parameters.


Stock market analysis is science of examining stock data and predicting their future moves on the stock market. Investors who use this style of analysis are often unconcerned about the nature or value of the companies they trade stocks in. Their holdings are usually short-term - once their projected profit is reached they drop the stock.


The basis for stock market analysis is the belief that stock prices move in predictable patterns. All the factors that influence price movement - company performance, the general state of the economy, natural disasters - are supposedly reflected in the stock market with great efficiency. This efficiency, coupled with historical trends produces movements that can be analyzed and applied to future stock market movements.


Stock market analysis is not intended for long-term investments because fundamental information concerning a company's potential for growth is not taken into account. Trades must be entered and exited at precise times, so technical analysts need to spend a great deal of time watching market movements. Most stock tips and recommendations are based on stock analysis methods.


Investors can take advantage of these stock analysis methods to track both upswings and downswings in price by deciding whether to go long or short on their portfolios. Stop-loss orders limit losses in the event that the market does not move as expected.


There are many tools available for stock market technical analysis. Hundreds of stock patterns have been developed over time. Most of them, however, rely on the basic stock analysis methods of 'support' and 'resistance'. Support is the level that downward prices are expected to rise from, and Resistance is the level that upward prices are expected to reach before falling again. In other words, prices tend to bounce once they have hit support or resistance levels.


Stock Analysis Charts & Patterns
Stock market analysis relies heavily on charts for tracking market movements. Bar charts are the most commonly used. They consist of vertical bars representing a particular time period - weekly, daily, hourly, or even by the minute. The top of each bar shows the highest price for the period, the bottom is the lowest price, and the small bar to the right is the opening price and the small bar to the left is the closing price. A great deal of information can be seen in glancing at bar charts. Long bars indicate a large price spread and the position of the side bars shows whether the price rose or dropped and also the spread between opening and closing prices.



A variation on the bar chart is the candlestick chart. These charts use solid bodies to indicate the variation between opening and closing prices and the lines (shadows) that extend above and below the body indicate the highest and lowest prices respectively. Candlestick bodies are coloured black or red if the closing price was lower than the previous period or white or green if the price closed higher. Candlesticks form various shapes that can indicate market movement. A green body with short shadows is bullish - the stock opened near its low and closed near its high. Conversely, a red body with short shadows is bearish - the stock opened near the high and closed near the low. These are only two of the more than 20 patterns that can be formed by candlesticks.


When glancing at charts the untrained eye may simply see random movements from one day to the next. Trained analysts, however, see patterns that are used to predict future movements of stock prices. There are hundreds of different indicators and patterns that can be applied. There is no one single reliable indicator, but these stock analysis methods when taken into consideration with others, investors can be quite successful in predicting price movements.
One of the most popular patterns is Cup and Handle. Prices start out relatively high then dip and come back up (the cup). They finally level out for a period (handle) before making a breakout - a sudden rise in price. Investors who buy on the handle can make good profits.


Another popular pattern is Head and Shoulders. This is formed by a peak (first shoulder) followed by a dip and then a higher peak (the head) followed again by a dip and a rise (the second shoulder). This is taken to be a bearish pattern with prices to fall substantially after the second shoulder.


Other Stock Market Analysis Methods
Moving Average - The most popular indicator is the moving average. This shows the average price over a period of time. For a 30 day moving average you add the closing prices for each of the 30 days and divide by 30. The most common averages are 20, 30, 50, 100, and 200 days. Longer time spans are less affected by daily price fluctuations. A moving average is plotted as a line on a graph of price changes. When prices fall below the moving average they have a tendency to keep on falling. Conversely, when prices rise above the moving average they tend to keep on rising.



Relative Strength Index (RSI) - This indicator compares the number of days a stock finishes up with the number of days it finishes down. It is calculated for a certain time span - usually between 9 and 15 days. The average number of up days is divided by the average number of down days. This number is added to one and the result is used to divide 100. This number is subtracted from 100. The RSI has a range between 0 and 100. A RSI of 70 or above can indicate a stock which is overbought and due for a fall in price. When the RSI falls below 30 the stock may be oversold and is a good time to buy. These numbers are not absolute - they can vary depending on whether the market is bullish or bearish. RSI charted over longer periods tend to show less extremes of movement. Looking at historical charts over a period of a year or so can give a good indicator of how a stock price moves in relation to its RSI.


Money Flow Index (MFI) - The RSI is calculated by following stock prices, but the Money Flow Index (MFI) takes into account the number of shares traded as well as the price. The range is from 0 to 100 and just like the RSI, an MFI of 70 is an indicator to sell and an MFI of 30 is an indicator to buy. Also like the RSI, when charted over longer periods of time the MFI can be more accurate as an indicator.


Bollinger Bands - This indicator is plotted as a grouping of 3 lines. The upper and lower lines are plotted according to market volatility. When the market is volatile the space between these lines widens and during times of less volatility the lines come closer together. The middle line is the simple moving average between the two outer lines (bands). As prices move closer to the lower band the stronger the indication is that the stock is oversold - the price should soon rise. As prices rise to the higher band the stock becomes more overbought meaning prices should fall. Bollinger bands are often used by investors to confirm other indicators. The wise technical analyst will always use a number of indicators before making a decision to trade a particular stock.

Emerging Markets: Is It Time to Cash In?

Emerging Markets: Is It Time to Cash In?

Knowledge@Wharton

Most emerging market economies are unlikely to de-couple from the U.S., a premise behind the sharp, brief rally in emerging stock markets last fall. Since the American economy and stock market started weakening in late 2007, so have most emerging markets.

Some developing countries may provide short-term investment gains due to specific economic factors. Are these increases sustainable? In this opinion piece, Ignatius Chithelen,managing partner of Banyan Tree Capital Management, an investment firm in New York City, argues that with most gains from emerging stock markets already behind us, it may be time to sell.

Since the summer of 2007, numerous signs of speculative excess have appeared in emerging markets:
Stocks in Shanghai and Shenzhen trading at 100% plus premiums to the prices at which the same Chinese stocks trade on the Hong Kong Exchange; reports of Chinese peasants pawning homes to buy stocks; frenzied bidding for IPOs in India of companies with no revenues and earnings; and commercial and residential real estate prices in major emerging market financial centers exceeding those in New York.

But the day the U.S. Federal Reserve began cutting rates last August, in an effort to tackle the growing subprime mortgage mess, some investment advisors and speculators identified emerging stock markets --and commodities -- as major beneficiaries of the Fed's action.
These strategists argued that a slowing U.S. economy would have little impact on emerging countries. The reason was that trade among these fast-growing countries was sizeable, they had large and growing domestic consumption, and they had benefited from the booming worldwide demand for commodities.

Further, unlike during the last series of crises in emerging markets in the 1990s, these economies were now in good financial shape. They collectively had a current account surplus of more than $600 billion a year, and their total foreign exchange reserves exceeded $2.7 trillion.
The speculators, meanwhile, rushed in with the belief that the liquidity generated by the Fed rate cuts would create yet another bubble, this time in emerging markets and commodities.
In just seven weeks following the Fed's August 2007 discount rate cut, institutions and individuals in the U.S. poured an estimated $24 billion into emerging equity markets. This was $1 billion more than the funds that flowed in during all of 2006, and the emerging markets moved up sharply.

The iShares MSCI Emerging Markets Index Fund (EEM), a New York Stock Exchange traded fund (ETF) that is representative of the MSCI Emerging Markets Index, climbed about 50% in less than two months, from late August to late October. But since then, as the U.S. economy and stock market have weakened, so have most emerging markets -- the EEM is down about 20%.

Buffett's Windfall
Over the five-year period ending December 2007, the MSCI Emerging Markets Index was up 383%, nearly five times the S&P 500 Index's 83% gain. Astute investors who, back in 2002 and 2003, perceived the growth in outsourcing of jobs from the U.S. and Europe to emerging countries or the rise in demand for various commodities, have enjoyed big gains by buying stocks, funds or ETFs that provided the country and/or industry exposure to such changes.
One widely reported example is Warren's Buffett's the country and/or industry exposure to such changes. One widely reported example is Warren's Buffett's estimated profit of $3.5 billion from the sale of PetroChina stock in mid 2007 -- a 500% plus gain in four years. So, looking in the rearview mirror, most if not all of the big relative gains from investing in emerging markets may be behind us.

Meanwhile, the economic underpinnings of these countries' growth could possibly weaken. Even though the domestic economies in major emerging markets are large, U.S. demand still continues to be a dominant factor.

American consumers are estimated to have spent some $9.5 trillion last year, more than twice what consumers spent in all emerging countries put together. In the two emerging countries with large populations, consumer spending was approximately $1 trillion in China and $600 billion in India.

So the slowdown in U.S. consumer spending, which could be long-lasting and deep, may hurt overall demand for goods and services from emerging markets, even assuming their internal consumption continues to grow.

One impact of falling demand from the U.S. on emerging market economies will be a drop in exports.

Roughly 20% of exports from China, India and Brazil go to the U.S. This figure, though, likely understates the size of effective exports to America from places like China and India. This is because some exports, as in the case of certain Chinese exports to Japan, end up as inputs for items that are then exported to the U.S.

Rising Inflation
In addition to the impact of a slowing U.S. economy, some emerging markets themselves face troubling issues. An immediate and major concern is the rise in inflation, which has already crippled Vietnam's economy and stock market and is affecting China and other countries.
I believe India's financial position is weaker than it might appear. The country has foreign reserves less foreign debt of about $100 billion, imports of crude oil needed to cover 85% of its 2.6 million barrels per day (bpd) consumption, a domestic budget deficit/GDP of 8% in 2007 and total public debt/GDP of 73%.

China is in a strong position with a net $1.2 trillion of foreign reserves. But China imports nearly half of the seven million bpd in crude oil it consumes, and it also depends on substantial imports of minerals and food items.

Infrastructure bottlenecks -- power shortages, congested ports, inadequate roads and railroads -- abound in emerging markets like India, Brazil and South Africa and these countries lack funds to tackle these problems.

Moreover, the growing gulf between rich and poor could lead to social unrest and politicalupheavals, whose outbreak could trigger an outflow of U.S. funds in a fearful hurry.
During the emerging markets boom of the 1990s, fund flows from the U.S., as well as Western Europe and Japan, flooded in near the peak and just before many of the emerging markets collapsed due to internal or external factors.

For instance, assets in emerging market mutual funds in the U.S. rocketed up from only $150 million in 1990 to $27 billion in 1996. Lots of money flooded in just before the collapse in emerging markets following the Asian financial crisis of 1997 and the Russian crisis of 1998.
A similar fund-flow pattern seems evident in the current cycle. Some 1,700 emerging market stock funds have attracted more than $150 billion of assets in the U.S. In 2007 alone, the in-flow into these funds was about $41 billion, 80% greater than in the previous year.

Again, most of the funds poured in late, chasing past performance. The EEM alone now has some $26 billion in assets, $10 billion more than a year ago, and is the third largest ETF in the U.S.
Together with fund flows from Western Europe and Japan, which tend to mimic ebbs and flows from the U.S., the total funds from developed countries in emerging stock markets is likely to be well in excess of $200 billion. The stock market float of Brazil, Russia, India and China -- marketed collectively as the BRIC countries -- is at best $1,200 billion and that of emerging markets as a whole about $1,500 billion.

So, the fund flows from the developed countries account for roughly a sixth of the entire tradable value of emerging stock markets. Little wonder that these investments have had a major impact on prices in these markets.

Inflows and Outflows
But the fund inflows from the U.S. can reverse fairly quickly into outflows, due to investment losses, signs of trouble and a lack of confidence, compounding any declines in emerging markets. This happened during the late 1990s and is already occurring this year. As emerging stock markets continued their post-October 2007 decline, in just one week -- the third week of January 2008 -- U.S. outflows from emerging markets totaled $11 billion, a quarter of the total inflow from the U.S. during all of last year.

I don't mean to paint a picture of unmitigated doom-and-gloom. In the short term, some emerging markets will benefit from rising demand and prices for crude oil, fertilizers, food grains and other commodities.

Russia is in a good position, given that it exports six million bpd of crude oil and alsoother minerals. In addition, the country has roughly $300 billion in net foreign reserves and good domestic finances. But the control of its resources by a shareholder un-friendly oligarchy, tied to the effective one-party rule of President Putin, does not offer good prospects. Brazil is in a good position, too, given its agricultural and mineral exports and its crude oil deposits.

The BRIC country markets have indeed de-coupled -- at least from one another. Since October, while stock markets in China and India have continued to fall, those in Russia and Brazil have recovered from their initial drop.

In the future, after the current euphoria and fund inflows ebb away and the business economics and stock valuations become attractive, opportunities for big relative gains will reappear in emerging markets.

Also, early identification of the beneficiaries of major long-term supply demand changes will produce some huge winners, such as some Indian IT firms whose stocks have gone up manifold since the early 1990s. Before that history repeats itself, though, I believe gravity will bring stock market valuations back to earth in the emerging markets.

Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

Nothing in this article is, or should be construed as, investment advice.