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Market Analysis - Stewardship Finance Academy
Without adequate analysis, you are essentially flying blind in the market. Market analysis can be compared to a planning strategy before war. Sending scouts, probing the market, capturing the bigger picture and paying attention to details are fundamental to attaining a victorious outcome. No one would want to fight an unprepared battle.
In this chapter, we are introducing 4 analysis skills to ‘stay alive’ and consistently generate income with your investments. Skills that you need to win the battle!
Fundamental Analysis is the study examining the underlying value of a security. Fundamental analysis is based on the concept that the price of a particular security does not reflect its real value. This underlying value of a security is also known as its intrinsic value. Intrinsic values may represent not just the security, but the actual health of an economy, industry group or a company. Fundamental analysis takes into consideration the economic overall well-being and performance, the industry conditions and even the management of companies. Based on the different qualitative and quantitative factors, the fundamental analyst then drives an intrinsic value to compare with the current market price. If the current market price is below the intrinsic value, it provides a “buy” signal. If the current market price is above the intrinsic value, it provides a “sell” signal. Some important documents for fundamental analysis are annual financial reports, quarterly financial reports, income statements, balance sheets and cash flow statements, etc.
Technical Analysis evaluates securities through processing statistics generated by market activity. These statistics can include information about a security’s historical price, time and volume. Compared to Fundamental Analysis, Technical Analysis is particularly focused on statistics, numbers and charts as the basis for analysis. Technical Analysts are not concerned about a security’s underlying value; instead, they use charts and other tools to identify patterns which might suggest future activity. Technical analysts believe all market actions are already reflected in the price. The price shows the final decision by the traders in regard to whatever factors contributed to the decision. Therefore, the effects that prices have on a security’s growth are more important than the intrinsic value of the security.
By studying the repetitive patterns of charts, using common techniques (such as moving averages, Bollinger bands, relative strength index, Fibonacci retracement, etc.) you can determine the momentum and price movement of a security, and identify its extreme conditions.
If Fundamental Analysis is like a customer checking and comparing discount products from Coles and Woolworths (two major retail stores in Australia), Technical Analysis would be like a person sitting outside both shops recording and collecting information about the number of customers coming in and out of each store, then plotting the data onto a graph.
Timing Cycle Analysis
The present comes from the past. We learn from what we know and in this way, humans become wiser. Just like climates and weather, some climates that occurred 100 years ago, will occur again. The Bible in Ecclesiastes 3:1 mentions “There is a time for everything, and a season for every activity under the heavens.” There is nothing new under the sun. The collective reactions of human behaviour stay the same throughout the history. Human nature doesn’t change. Therefore, Timing Cycle Analysis proves to be able to predict future conditions based on past cyclical patterns.
Timing Cycle Analysis is the study of market prices and their behaviour patterns, which occur in some simple cyclical patterns. Cycles may be defined as any phenomena repeating after fairly regular time intervals. Generally, cycles are found in anything to which numerical measurements may be assigned at intervals in time. Edward Dewey of the Foundation for the Study of Cycles said that every field studied had been found to have cycles. By studying each cycle’s difference in both the period (cycle length)
and the amplitude (the price fluctuations), you will be able to predict the next peak or next valley. By a study of the time cycles you will learn why tops and bottoms are formed at certain times. Time cycle analysis takes into account features of both fundamental and technical analysis techniques to achieve the timing cycle study.
Sentimental Analysis, also called behavioural finance study, is the process to derive the opinions, emotions and attitudes towards a financial product. The study is to determine the market sentiment. It can be positive, negative or neutral. For example, there are programs that use a combination of text mining with algorithms formula to identify key indicators in the comments people are saying to determine their sentiment levels. News, blogs and articles are extremely easy to access. Financial news or blogs written by analysts or finance researchers can help us better understand investors’ behaviour towards a particular product or market as well. To analyse the investor’s emotions and attitudes is what we do in Sentimental Analysis.