Alternative Analysis Methods Applied to the German Stock Market E-Book

Timo Schlichting

• Herausgeber: GRIN Verlag
• Sprache: Englisch

Veröffentlichungsjahr: 2009

Beschreibung

Seminar paper from the year 2008 in the subject Business economics - Investment and Finance, grade: 1,0, University of Applied Sciences Essen, language: English, abstract: The price movements of stocks are the result of complex interdependencies due to a vast number of influencing factors – such as fundamental and psychological factors – are expressed in the expectations and the behavior of the stock market participants. To cope with this complexity and to derive an applicable asset strategy, analysts distinguish particularly between two dominant analysis methods in practice – the Fundamental and the Technical Analysis – which have recently been supplemented by the approach of Behavioral Finance. With reference to a strict interpretation of the theoretical assumptions of the Fundamental as well as the Technical Analysis these two concepts are mutually exclusive. As a result of this there are a vast number of analysts who either acknowledge the Fundamental Analysis while denying the Technical Analysis and vice versa. The Fundamentals criticize that the technical approach has a lack in academic foundation and is, therefore similar to a kind of reading tea leaves, whereas the Technicals are convinced that the Fundamental Analysis is not able to generate an advantage by analyzing the fundamental value drivers of a stock, because those are already reflected by the current market prices. In practice the Fundamental Analysis seems to have its weaknesses particularly during extreme market phases – e.g. during the New Economy bubble at the end of the nineties – in which the psychology of the market participants gains in impact. At the same time the fundamental aspects are seemingly neglected. Furthermore, the fundamental approach seems to have improvement capabilities particularly in terms of timing. Psychological aspects of the market participants are at least indirectly included within the Technical Analysis, which could be particularly used for timing decisions as well. Nevertheless, it has its weaknesses too, e.g. it does not provide clearly defined interpretation rules for its various numbers of chart patterns and technical indicators. Behavioral Finance seems to have its existence authority in practice as well, due to decisions in stock markets made by human beings, who do not always behave total rationally. All these aspects lead to the master question if the two alternative analysis methods – Technical Analysis and Behavioral Finance – can deliver any useable supplements towards the Fundamental Analysis in terms of their practical application?

Leseprobe

Table of Content

1. Introduction.

1.1. Basic conditions

1.2. Problems

1.3. Objective

1.4. Procedure.

2. Analysis methods

2.1. Fundamental Analysis

2.2. Alternative analysis methods.

2.2.1. Technical Analysis.

2.2.1.1. Premises of Technical Analysis

2.2.1.2. Distinction between Chart Analysis and Technical Indicators

2.2.1.2.1. Chart Analysis

2.2.1.2.1.1. Techniques of chart representation

2.2.1.2.1.2. Trend analysis

2.2.1.2.1.2.1. Support and Resistance.

2.2.1.2.1.2.2. Trend lines and Trend Channels

2.2.1.2.1.2.3. Continuation patterns.

2.2.1.2.1.2.4. Reversal patterns.

2.2.1.2.2. Technical Indicators

2.2.1.2.2.1. Trend-following Indicators.

2.2.1.2.2.2. Oscillators.

2.2.2. Behavioral Finance.

2.2.2.1. Premises of Behavioral Finance

2.2.2.2. Distinction between Behavioral Finance and Sentiment Analysis

2.2.2.2.1. Individual psychological aspects

2.2.2.2.1.1. Motives and needs of market participants.

2.2.2.2.1.2. Behavior of market participants

2.2.2.2.1.2.1. Rationality failures during information apperception.

2.2.2.2.1.2.1.1. Simplification of circumstances

2.2.2.2.1.2.1.2. Selective apperception

2.2.2.2.1.2.1.3. Relative Evaluation.

2.2.2.2.1.2.2. Rationality failures concerning the behavior.

2.2.2.2.1.2.2.1. Heuristics

2.2.2.2.1.2.2.2. Herding

2.2.2.2.2. Sentiment Analysis.

2.2.2.2.2.1. Premises of Sentiment Analysis

2.2.2.2.2.2. Sentiment indicators based on market data.

2.2.2.2.2.3 Sentiment indicators based on public opinion polls.

3. Synthesis capabilities

3.1. Proposal of a synthesis concept.

3.2. Synthesis concept applied to BASF AG

4. Conclusion

Page 1

Page 4

II. List of figures

II. List of figures

Figure 1: Primary, intermediate and short-term trend as well as upward trend,

Figure 2: Support and Resistance areas applied by the example of BASF AG, period: 2007/01/01 - 2007/12/31..........................................................10 Figure 3: Trend lines and Trend Channels shown by the example of the DAX Performance Index, period: 2007/01/01 - 2007/08/31..........................13 Figure 4: Flags and pennants illustrated by the example of the Daimler Chrysler AG, period: 2005/01/01 - 2005/12/31...................................................16 Figure 5: Double bottom and double / triple top as well as an inverse head and

Figure 6: V bottom and rounding bottom shown by the example of the Versatel AG, period: 2007/04/30 - 2007/12/31...................................................18 Figure 7: Moving average of 38 and 200 days, and the MACD-Indicator applied to

Figure 8: Momentum and Relative Strength Index applied to the example of DAX Performance Index, period: 2007/01/01 - 2007/12/31..........................22 Figure 9: Simplification of circumstances illustrated by the example of Vivacon AG, 2007/01/01 - 2007/12/31 ..............................................................29 Figure 10: Relative Evaluation illustrated by the example of Daimler Chrysler AG, period: 2005/01/01 - 2005/12/31..........................................................31 Figure 11: Heuristics illustrated by the example of BASF AG, period 2007/01/01 -2007/12/31 ...........................................................................................33 Figure 12: Herding shown by the example of Versatel AG, period 2007/04/30 -

2007/12/31 ...........................................................................................34 Figure 13: Sentix - DAX development versus DAX sentiment, period: 2007/01/26 -

2007/12/31 ...........................................................................................37

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II. List of figures

Figure 14: AnimusX - news-barometer stocks, period: 2007/01/29 - 2007/12/31 .38 Figure 15: AnimusX - Sentiment for the 30 stocks within the DAX, periods: 2007/05/14 - 2007/05/20 and 2007/08/06 - 2007/08/12 ......................39 Figure 16: Synthesis capabilities of the Fundamental Analysis approach with the

Figure 17: Synthesis capabilities of the Fundamental Analysis approach with the

Page 6

III. List of Abbreviations

III. List of Abbreviations

•CDO Collateralized Debt Obligation

•DAX Deutscher Aktien Index

•EMH Efficient Market Hypothesis

•MACD Moving Average Convergence Divergence

•MDAX Mid-Cap-DAX

•RSI Relative Strength Index

•SDAX Small-Cap-DAX

•TecDAX Technology DAX

Page 7

1. Intoduction 1

1. Introduction

1.1. Basic conditions

At all times stock investors have been trying to develop analysis methods which should enable them to receive an above-average return to outperform the broad stock market (Klein 1999). Due to this attempt, a vast number of various analysis methods have been developed to predict the stock prices in the future. The price movements of stocks are the result of complex interdependencies due to a vast number of influencing factors - such as fundamental and psychological factors - are expressed in the expectations and the behavior of the stock market participants (Klein 1999). To cope with this complexity and to derive an applicable asset strategy, analysts distinguish particularly between two dominant analysis methods in practice - the Fundamental and the Technical Analysis - which have recently been supplemented by the approach of Behavioral Finance (Cesar 1996).

1.2. Problems

With reference to a strict interpretation of the theoretical assumptions of the Fundamental as well as the Technical Analysis these two concepts are mutually exclusive (Edwards et al. 2007).

As a result of this there are a vast number of analysts who either acknowledge the Fundamental Analysis while denying the Technical Analysis and vice versa (Cesar 1996).

The Fundamentals criticize that the technical approach has a lack in academic foundation and is, therefore similar to a kind of reading tea leaves, whereas the Technicals are convinced that the Fundamental Analysis is not able to generate an advantage by analyzing the fundamental value drivers of a stock, because those are already reflected by the current market prices (Murphy 1999). In practice the Fundamental Analysis seems to have its weaknesses particularly during extreme market phases - e.g. during the New Economy bubble at the end of the nineties - in which the psychology of the market participants gains in impact. At the same time the fundamental aspects are seemingly neglected (Malkiel 1999). Furthermore, the fundamental approach seems to have improvement capabilities particularly in terms of timing (Montassér 2000).