The Use of Technical and Fundamental Analysis in the Stock Market in Emerging and Developed Economies The Use of Technical and Fundamental Analysis in the Stock Market in Emerging and Developed Economies By Naveen B Kumar Indian School of Business, Hyderabad, India Sanjay Mohapatra Xavier Institute of Management, Bhubaneswar, India United Kingdom – North America – Japan     India – Malaysia – China Emerald Group Publishing Limited Howard House, Wagon Lane, Bingley BD16 1WA, UK First edition 2015 Copyright © 2015 Emerald Group Publishing Limited Reprints and permissions service Contact: permissions@emeraldinsight.com No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center Any opinions expressed in the chapters are those of the authors Whilst Emerald makes every effort to ensure the quality and accuracy of its content, Emerald makes no representation implied or otherwise, as to the chapters’ suitability and application and disclaims any warranties, express or implied, to their use British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN: 978-1-78560-405-8 Contents List of Tables List of Charts List of Abbreviations Abstract CHAPTER 1  Introduction 1.1 Securities Market in India: An Overview 1.1.1 Origin of Indian Stock Market 1.1.2 Assessment of Performance of Indian Securities Market (2000–2010) 1.1.3 Market Segments 1.1.4 Market Participants 1.1.5 Secondary Market 1.1.6 Cash Market 1.1.7 India and International Comparison 1.2 Definitions of Technical Analysis and Fundamental Analysis 1.3 Importance and Need of the Study 1.4 Objectives of the Study 1.5 Hypotheses 1.6 Research Methodology 1.6.1 Sources of Data 1.6.2 Sampling Plan 1.6.3 Methods of Data Collection 1.6.4 Data Analysis Tools and Techniques 1.7 Scope and Limitations of the Study 1.8 Organisation of the Study CHAPTER 2  Introduction to Various Approaches 2.1 Introduction 2.2 Fundamental Approach 2.2.1 Discounted Cash Flow Valuation 2.2.2 Dividend Discount Models 2.2.3 Relative Valuation 2.2.4 Value-Added Methods 2.3 Technical Approach 2.3.1 The Dow Theory 2.3.2 Types of Charts 2.3.3 Trends 2.3.4 Price Pattern 2.3.5 Indicators 2.3.6 Other Tools and Techniques 2.3.7 Sentiment Indicators CHAPTER 3  Review of Literature 3.1 Review of Existing Literature 3.2 Research Gap CHAPTER 4  Data Analysis and Interpretation 4.1 Introduction 4.2 Demographic Analysis 4.2.1 Gender 4.2.2 Age Groups 4.2.3 Relevant Work Experience 4.3 Objective – Time Period Analysis 4.3.1 ANOVA One Way Using SPSS 4.3.2 Kruskal–Wallis H Test Using SPSS 4.4 Objective – Importance Factors’ Analysis 4.4.1 ANOVA One Way Using SPSS 4.4.2 Kruskal–Wallis H Test Using SPSSS 4.5 Objective – Complementarity Analysis 4.6 Objective – Demographic and Technical and Fundamental Tools Association Analysis 4.6.1 Chi-Square Tests 4.6.2 Gender versus Analytical Techniques 4.6.3 Gender versus Computer Graphics and Services 4.6.4 Gender versus Chartist Publication 4.6.5 Gender versus Chart Company or Analyst 4.6.6 Gender versus Sentiment Indicators 4.6.7 Gender versus Earnings Multiple Method 4.6.8 Gender versus Discounted Cash Flows Methods 4.6.9 Gender versus Dividend Discount Models 4.6.10 Gender versus Value Added Concept 4.6.11 Age versus Analytical Techniques 4.6.12 Age versus Computer Graphics and Services 4.6.13 Age versus Chartist Publications 4.6.14 Age versus Chart Company or Analyst 4.6.15 Age versus Sentiment Indicators 4.6.16 Age versus Earnings Multiple Methods 4.6.17 Age versus Discounted Cash Flows Methods 4.6.18 Age versus Dividend Discount Models 4.6.19 Age versus Value Added Concepts 4.7 Crosstabs 4.7.1 Experience (EXP) versus Analytical Techniques 4.7.2 Experience (EXP) versus Computer Graphics and Services 4.7.3 Experience (EXP) versus Chartist Publications 4.7.4 Experience (EXP) versus Chart Company or Analyst 4.7.5 Experience (EXP) versus Sentiment Indicators 4.7.6 Experience (EXP) versus Earnings Multiple Methods 4.7.7 Experience (EXP) versus Discounted Cash Flows Methods 4.7.8 Experience (EXP) versus Dividend Discount Models 4.7.9 Experience (EXP) versus Value Added Concepts CHAPTER 5  Conclusions and Recommendations 5.1 5.2 5.3 5.4 5.5 Objective – Time Period Objective – Importance Factors Objective – Complementarity Objective – Demographic and Technical and Fundamental Tools Association Scope for Future Research Appendices Bibliography Index List of Tables Chapter Table 1.1 Key Performance Indicators of Securities Market (2000–2010) Table 1.2 Secondary Market – Selected Indicators Table 1.3 International Comparison of Global Stock Markets Table 1.4 Research Methodology Framework Table 1.5 Determination of Sample Size Chapter Table 4.1 Gender Composition in the Sample Table 4.2 Age Groups of the Respondents Table 4.3 Relevant Work Experience Table 4.4 Descriptives of Time Period Table 4.5 One Way ANOVA of Time Period Table 4.6 Robust Tests of Equality of Means-Time Period Table 4.7 Post Hoc Tests of Time Period Table 4.8 Technicality Degree Table 4.9 Overall Means of Time Period Table 4.10 Descriptive Statistics – Kruskal–Wallis Test-Time Period Table 4.11 Kruskal–Wallis Ranks – Time Period Table 4.12 Kruskal–Wallis Test Statistics-Time Period Table 4.13 Mann–Whitney U Test (Intraday and Week) Ranks Table 4.14 Mann–Whitney U Test (Intraday and Week) Statistics Table 4.15 Mann–Whitney U Test (Intraday and Month) Ranks Table 4.16 Mann–Whitney U Test (Intraday and Month) Test Statistics Table 4.17 Mann–Whitney U Test (Intraday and Months) Ranks Table 4.18 Mann–Whitney U Test (Intraday and Months) Test Statistics Table 4.19 Mann–Whitney U Test (Intraday and Months) Ranks Table 4.20 Mann–Whitney U Test (Intraday and Months) Test Statistics Table 4.21 Mann–Whitney U Test (Intraday and Year) Ranks Table 4.22 Mann–Whitney U Test (Intraday and Year) Test Statistics Table 4.23 Mann–Whitney U Test (Intraday and beyond Year) Ranks Table 4.24 Mann–Whitney U Test (Intraday and beyond Year) Test Statistics Table 4.25 Mann–Whitney U Test (1 Week and Month) Ranks Table 4.26 Mann–Whitney U Test (1 Week and Month) Test Statistics Table 4.27 Mann–Whitney U Test (1 Week and Months) Ranks Table 4.28 Mann–Whitney U Test (1 Week and Months) Test Statistics Table 4.29 Mann–Whitney U Test (1 Week and Months) Ranks Table 4.30 Mann–Whitney U Test (1 Week and Months) Test Statistics Table 4.31 Mann–Whitney U Test (1 Week and Year) Ranks Table 4.32 Mann–Whitney U Test (1 Week and Year) Test Statistics Table 4.33 Mann–Whitney U Test (1 Week and beyond Year) Ranks Table 4.34 Mann–Whitney U Test (1 Week and beyond Year) Test Statistics Table 4.35 Mann–Whitney U Test (1 Month and Months) Ranks Table 4.36 Mann–Whitney U Test (1 Month and Months) Test Statistics Table 4.37 Mann–Whitney U Test (1 Month and Months) Ranks Table 4.38 Mann–Whitney U Test (1 Month and Months) Test Statistics Table 4.39 Mann–Whitney U Test (1 Month and Year) Ranks Table 4.40 Mann–Whitney U Test (1 Month and Year) Test Statistics Table 4.41 Mann–Whitney U Test (1 Month and beyond Year) Ranks Table 4.42 Mann–Whitney U Test (1 Month and beyond Year) Test Statistics Table 4.43 Mann–Whitney U Test (3 Months and Months) Ranks Table 4.44 Mann–Whitney U Test (3 Months and Months) Test Statistics Table 4.45 Mann–Whitney U Test (3 Months and Year) Ranks Table 4.46 Mann–Whitney U Test (3 Months and Year) Test Statistics Table 4.47 Mann–Whitney U Test (3 Months and beyond Year) Ranks Table 4.48 Mann–Whitney U Test (3 Months and beyond Year) Test Statistics Table 4.49 Mann–Whitney U Test (6 Months and Year) Ranks Table 4.50 Mann–Whitney U Test (6 Months and Year) Test Statistics Table 4.51 Mann–Whitney U Test (6 Months and beyond Year) Ranks Table 4.52 Mann–Whitney U Test (6 Months and beyond Year) Test Statistics Table 4.53 Mann–Whitney U Test (1 Year and beyond Year) Ranks Table 4.54 Mann–Whitney U Test (1 Year and beyond Year) Test Statistics Table 4.55 Descriptives of Importance Factors Table 4.56 One Way ANOVA of Importance Factors Table 4.57 Robust Tests of Equality of Means-Importance Factors Table 4.58 Post Hoc Tests of Importance Factors Table 4.59 Means of Importance Factors Table 4.60 Homogeneous Subsets of Importance Factors Table 4.61 Kruskal–Wallis Descriptive Statistics-Importance Factors Table 4.62 Kruskal–Wallis Test Ranks-Importance Factors Table 4.63 Kruskal–Wallis Test Statistics-Importance Factors Table 4.64 Mann–Whitney U Test (Risk Factors and Liquidity Factors) Ranks Table 4.65 Mann–Whitney U Test (Risk Factors and Liquidity Factors) Test Statistics Table 4.66 Mann–Whitney U Test (Risk Factors and Financial Factors) Ranks Table 4.67 Mann–Whitney U Test (Risk Factors and Financial Factors) Test Statistics Table 4.68 Mann–Whitney U Test (Risk Factors and Technical Factors) Ranks Table 4.69 Mann–Whitney U Test (Risk Factors and Technical Factors) Test Statistics Table 4.70 Mann–Whitney U Test (Risk Factors and Economic Factors) Ranks Table 4.71 Mann–Whitney U Test (Risk Factors and Economic Factors) Test Statistics Table 4.72 Mann–Whitney U Test (Risk Factors and Industry Specific Factors) Ranks Table 4.73 Mann–Whitney U Test (Risk Factors and Industry Specific Factors) Test Statistics Table 4.74 Mann–Whitney U Test (Risk Factors and Company Specific Factors) Ranks Table 4.75 Mann–Whitney U Test (Risk Factors and Company Specific Factors) Test Statistics Table 4.76 Mann–Whitney U Test (Risk Factors and Others) Ranks Table 4.77 Mann–Whitney U Test (Risk Factors and Others) Test Statistics Table 4.78 Mann–Whitney U Test (Liquidity Factors and Financial Factors) Ranks Table 4.79 Mann–Whitney U Test (Liquidity Factors and Financial Factors) Test Statistics Table 4.80 Mann–Whitney U Test (Liquidity Factors and Technical Factors) Ranks Table 4.81 Mann–Whitney U Test (Liquidity Factors and Technical Factors) Test Statistics Table 4.82 Mann–Whitney U Test (Liquidity Factors and Economic Factors Ranks 20 21 22 23 24 25 26 27 analytical techniques There is no relationship between usage of computer graphics and services and the effect of experience (Hypothesis testing) Usage of computer graphics and services is independent of experience (Table 4.159) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of computer graphics and services There is no relationship between usage of chartist publications and the effect of experience (Hypothesis testing) Usage of chartist publications is independent of experience (Table 4.161) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of chartist publications There is no relationship between usage of chart company or analyst and the effect of experience (Hypothesis testing) Usage of chart company or analyst is independent of experience (Table 4.163) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of chart company or analyst There is no relationship between usage of sentiment indicators and the effect of experience (Hypothesis testing) Usage of sentiment indicators is independent of experience (Table 4.165) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of sentiment indicators There is no relationship between usage of earnings multiple methods and the effect of experience (Hypothesis testing) Usage of earnings multiple methods is independent of experience (Table 4.167) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of earnings multiple methods There is no relationship between usage of discounted cash flows methods and the effect of experience (Hypothesis testing) Usage of discounted cash flows methods is independent of experience (Table 4.169) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of discounted cash flows methods There is no relationship between usage of dividend discount models and the effect of experience (Hypothesis testing) Usage of dividend discount models is independent of experience (Table 4.171) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of dividend discount models There is no relationship between usage of value-added concepts and the effect of experience (Hypothesis testing) Usage of value-added concepts is independent of experience (Table 4.173) Thus it is suggested that investors may ignore experience of the brokers with respect to usage of value-added concepts 5.5 Scope for Future Research Further study can be done by comparing developed stock markets with emerging and developing stock markets across countries investigating the differences in the usage of technical and fundamental analysis among different players in the stock market like mutual fund managers, brokers, investment bankers, financial news reporters financial analysts etc Appendices Annexure A: Questionnaire Annexure B: Pilot Study Results To test the questionnaire aimed at studying usage of technical and fundamental analysis among brokers in the Indian Stock Market, pilot study was conducted The questionnaire was administered to a sample of 25 respondents using convenience sampling Through this pilot study, validity and reliability of the questionnaire was tested RESULTS OF PILOT STUDY Scale: time period Table B1: Case Processing Summary – Time Period Table B2: Reliability Statistics – Time Period Scale: importance factors Table B3: Case Processing Summary – Importance Factors Table B4: Reliability Statistics – Importance Factors Bibliography Achelis, S B (2001) Technical analysis from A to Z New York, NY: McGraw-Hill 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Some new evidence Journal of Banking and Finance, 27, 673–697 Databases Capitaline CapitalIQ Datamonitor Economic Intelligence Service ET Intelligence Group ISI Emerging Markets JSTOR LexisNexis Prowess ScienceDirect Springer SSRN Internet Websites Cambridge Dictionary Online “Technical Analysis” Retrieved from www.dictionary.cambridge.org Accessed on February 4, 2010 Definitions “Fundamental Analysis” Retrieved from www.investopedia.com Accessed on February 4, 2010 Definitions “Sentiment Indicators” Retrieved from www.investopedia.com Accessed on February 3, 2010 Definitions “Technical Analysis” Retrieved from www.investopedia.com Accessed on February 4, 2010 “Economic Value Added” Retrieved from www.enwikipedia.org Accessed on February 3, 2010 “EV/EBITDA” Retrieved from www.en.wikipedia.org Accessed on February 3, 2010 Handbook of Statistics on the Indian Securities Market Retrieved from www.sebi.gov.in “Market Value Added” Retrieved from www.en.wikipedia.org Accessed on February 3, 2010 Oxford Dictionary Online “Technical Analysis” Retrieved from www.oxforddictonaries.com Accessed on February 4, 2010 Securities Market in India: An Overview Retrieved from www.nseindia.com April 5, 2010 Retrieved from www.bseindia.com Retrieved from www.dictionary.cambridge.org Retrieved from www.en.wikipedia.org Retrieved from www.google.com Retrieved from www.incrediblecharts.com Retrieved from www.investopedia.com Retrieved from www.jstor.org Retrieved from www.nseindia.com Retrieved from www.oxforddictonaries.com Retrieved from www.papers.ssrn.com Retrieved from www.researchpapers.net Retrieved from www.sciencedirect.com Retrieved from www.springerlink.com Retrieved from www.sebi.gov.in Index Adjusted present value method, 22 Age groups, 64–65, 132–135, 137–140, 142–143, 145–146, 148–150, 179 Analytical Techniques, 13–14, 115–118, 131–134, 152–154, 169–170, 177–179 Bar chart, 31–33, 45, 118–120, 122–123, 125, 127–128, 130, 132, 134, 136, 138, 141, 143, 145, 147, 150, 152, 154, 156, 158–159, 161, 163, 165, 167, 171 Bombay Stock Exchange, 2, 63 Book value, 24, 28–29 Breakaway gap, 45, 47 Brokers, 2, 4, 7, 11–13, 15–19, 21, 46, 58–59, 63, 66, 71–73, 87, 95, 114–115, 173, 175–180 Candlesticks, 31, 33–34 Case Processing Summary, 185 Chartist, 8, 12–14, 17–19, 21, 51–52, 54, 71–72, 115–116, 119–122, 137–138, 156–158, 169–170, 174–175, 177–180 Chi-square test, 15, 18, 63, 115, 117, 119, 121, 123–126, 128–131, 133–134, 136, 138, 140, 142, 145, 147, 149, 151, 153, 155, 157, 159, 161–168 Company specific factors, 11, 12, 13, 18, 87–88, 90–91, 93–95, 99, 103, 106–107, 109–113, 175–176 Composite, 47 Convergence, 40, 43–44 Cost of capital, 22–24, 29 Descriptives, 67, 88, 153–154, 156, 158, 160, 162, 164, 166, 168 Descriptives of Age, 132, 135, 137, 139, 141, 144, 146, 148, 151 Descriptives of Gender, 117–118, 120, 122, 124, 126–127, 129, 131 Discounted cash flows method, 13–14, 115–116, 126–128, 145–147, 163–165, 169–171, 178–180 Divergence, 41, 44 Dividend discount models, 13–14, 22, 25, 115–116, 129–130, 148–150, 165–167, 169–171, 178–180 Double bottom, 38 Double top, 36–38 Dow Theory, 31 Earnings multiple method, 13–14, 115–116, 125–127, 143–145, 161–163, 169–171, 178–180 Economic factors, 11–13, 18, 87–88, 90–91, 93–95, 98, 101–102, 105, 107–108, 110–111, 175–176 Economic value added, 29 Emerging market, 8–9 Enterprise value, 28–29 Equality of Means, 67, 88 Exhaustion gap, 45–47 Experience, 14, 17, 26, 65–66, 73, 116, 152–168, 171, 179–180 Financial factors, 12–13, 18, 87–88, 90–91, 93–97, 100–101, 104–107, 175–176 Financial markets, 8, 21, 51–54 Flow to equity, 22 Forecast, 8, 10–11, 21, 51–54, 57–58, 72, 175–176 Fundamental, 8, 10–1215, 17–19, 21–22, 51–59, 6371–73, 114–115, 173–177, 180, 185 Gender composition, 64 General techniques, 21, 51 Global Stock Markets, Gross Domestic Product, Head and Shoulders Pattern, 37 Homogeneous subsets, 93 Importance factors, 87–90, 93–96, 175–176 Industry specific factors, 12–13, 18, 87–88, 90–91, 93–95, 98–99, 102–103, 105–106, 108, 110, 112–113, 175–176 Intraday and Month, 75 Intraday and Week, 68, 70–72, 74–75, 174 Intraday and Year, 77 Intraday and Months, 75–76 Intraday and Months, 76 Intraday and beyond Year, 77–78 Intrinsic, 10–11, 21, 30, 51–52 Key Performance Indicators, Kruskal Wallis, 15, 17, 18, 63, 73, 74, 94, 95, 96, 174, 176 Levered cash flow, 24 Line chart, 31–32 Liquidity factors, 12–13, 18, 87–88, 90–91, 93–96, 100–104, 175–176 Mann-Whitney U Test, 15, 18, 63, 74–87, 95–113, 174, 176 Market participants, 4–5, 21, 51, 54, 56, 177 Market prices, 21, 51 Methodology, 14–15, 19, 56–57 Month and year, 82 Month and months, 70, 81 Month and months, 81–82 Month and beyond year, 83 Months and year, 84 Months and months, 83–84 Months and beyond year, 84–85 Months and year, 71, 85, 174 Months and beyond year, 86 Moving average, 8, 40, 42–45, 52, 55–58 National Stock Exchange, One way ANOVA, 12–13, 15, 18, 66–68, 73, 87–89, 94 Operating profit, 29 Overall means, 71, 174 Perceived importance, 21, 54–55 Point and figure chart, 31–33 Post hoc tests, 63, 68, 89–90, 173, 175 Present value, 1, 22, 51 Price to book value ratio, 28 Price to earnings ratio, 28 Price to sales ratio, 28–29 Ranks, 73–113 Rate of change, 39–41 Rectangle Formation, 40 Relative strength index, 39–40, 42, 58 Relevant work experience, 17, 65–66 Reliability, 17, 185 Resistance line, 35–36 Respondents, 16–17, 63–65, 117, 119, 121, 124–126, 129–130, 133, 135, 138, 140, 142–143, 146, 149–150, 152, 155, 157, 159–160, 162, 164, 166–167 Risk Factors and Liquidity Factors, 96 Robust Tests, 67, 88 Runaway gap, 45–47 Sample size, 15–16, 63, 93 Secondary market, 5, Securities and Exchange Board of India, Securities market, 1–6, 16, 19 Selected Indicators, Sentiment indicators, 13–14, 46–47, 115–116, 123–125, 140–143, 160–161, 169–170, 177–180 Singapore Stock Exchange, 58 Singapore Straits Times Industrial Index, 58 Standard and Poor, 56 Statistics, 10, 16, 30, 54, 73–87, 95–113, 169–171 Stochastic oscillator, 39–41 Stock market, 1–2, 8–11, 16–18, 21, 31, 51–53, 56–59, 174–175, 177, 180 Stock traders, 21, 51 Summary of Chi-square, 169–171 Support line, 35–36 Technical factors, 12–13, 18, 87–88, 90–91, 93–95, 97, 101, 104–105, 107–110, 175–176 Technical, 2, 4, 6, 8, 10–12, 14–19, 21–22, 24, 26, 28, 30–32, 34, 48–49, 51–59, 63, 66, 72, 114–115, 173–174, 177, 180 Technicality Degree, 71 Test Statistics, 74–87, 96–113 Time period, 26, 32, 56, 66–69, 71–87, 173–174 Trend line, 35 Triangle formation, 38–39 Unlevered cash Flows, 23–24 Week and month, 78, 174 Week and year, 80 Week and months, 78–79 Week and months, 79 Week and beyond year, 80–81 Year and beyond year, 12, 17–18, 66, 73, 86–87, 173 .. .The Use of Technical and Fundamental Analysis in the Stock Market in Emerging and Developed Economies The Use of Technical and Fundamental Analysis in the Stock Market in Emerging and Developed. .. structure and the developments of the Indian securities markets and broader developments in the securities markets during 2000–2010.1 1.1.1 ORIGIN OF INDIAN STOCK MARKET The origin of the stock market. .. analysis in the Indian stock market (emerging market) by brokers and the perceived importance attached to them by brokers A CHAPTER Introduction How we value the stock market now and in the future influences