Stocks Relative Strength Index and New High-New Lows Indicator - Assignment Example

READ THREE QUESTIONS AND THEN WRITE AN ESSAY READ THREE QUESTIONS AND THEN WRITE AN ESSAY A). Stock’s relative strength index 1. The 20-day period from 9/30/13 to 10/31/13 RSI=100- 100 1-RS =-0.7661% The relative strength index is used to indicate on whether to buy or sell a stock. In addition, it is applied to verify the price movement of stock. When the prices of the share fall, it becomes appropriate to buy. On the contrary, whenever prices increase it is appropriate sell the shares held (Smart et al, 2014). 2. The 22-day period from 11/30/13 to 12/31/13 RSI=100- 100 1-RS =0.5125 -0.55 -0.9318% The index is getting lower as days go when the trading period progresses. The latest RSI measure is giving a buy signal since it is indicating that the prices of stocks in the market are strengthening. According to the technical indicators, it is an appropriate time for Brett to purchase Nautilus Navigation shares. The RSI indicates prices of shares may be rectified. However, in December it shows it has fallen (Smart et al, 2014). b). 1 Days 3. In August, the prices of the stocks were beyond the moving average. After some days, the prices went below the average line. As of 12/31/13, the moving average was giving selling option since the shares had reached its maximum level. On the particular date, the prices had hit the highest level in the market for the 52 week period. The RSI is used as an indicator for buying and selling of stocks. The results are similar to that found similar with the RSI (Smart et al., 2014). C). Brett should not rely only on technical analysis to make decisions to buy and sell Nautilus Navigation stocks. In an efficient market, past performance cannot be used to invest in shares (Smart et al., 2014). Case problem 9.2 A). Advance –Decline line = (Quantity of Advancing Stocks - Quantity of Declining Stocks) + Previous Periods Advance decline line Value Period 1 Period 3 Period 5 =(1,120-2130)+0 (1,270-1980)+1,972 (1,929-1,321)+1,334 =-1010 =1262 =1942 Period 2 Period 4 =(1,278-1,972)+2130 (1,916-1,334)+1,980 =1436 =2562 New highs-new lows indicator=New highs-New lows Period 1=68-75 Period 2= 85-60 Period 3=85-80 Period 4=120-75 =-7 =25 =5 =45 Period 5=200-20 =180 Arms index=(advancing issues/declining issues) (Quantity of advancing issues/Quantity of declining issues) Period 1 Period 2 =(1,120/2130)/ (1,278/1,972)/ (600,000,000/600,000,000) (836,254,123/263,745,877) =0.53 =0.2 Period 3 Period 4 (1,270/,1,980)/(275,637,497/824,362,503) (1,916/1,334)/(875,365,980/424,634,020) =1.94 =0.71 Period 5 (1,929/1,321)/(1,159,534,291/313,366,599) =0.4 Mutual fund cash ratio Mutual fund cash ratio refers to a rate that is usually calculated to compare cash with the assets of the organization. Investors evaluate the demand for shares using the information. In addition, it is applied in assessing whether the prices of stock will rise or fall in future (Smart et al., 2014). Period 1 Mutual fund cash ratio=Mutual fund cash (trillions of dollars) Total assets managed (trillions of dollars) =$0.31 $6.94 =$0.045(trillion of dollars) Period 2 Mutual fund cash ratio=Mutual fund cash (trillions of dollars) Total assets managed (trillions of dollars) =$0.32 $6.40 =$0.05 (trillion of dollars) Period 3 Mutual fund cash ratio=Mutual fund cash (trillions of dollars) Total assets managed (trillions of dollars) =$0.47 $6.78 =$0.07 (trillion of dollars) Period 4 Mutual fund cash ratio=Mutual fund cash (trillions of dollars) Total assets managed (trillions of dollars) =$0.61 $6.73 =$0.091 (trillion of dollars) Period 5 Mutual fund cash ratio=Mutual fund cash (trillions of dollars) Total assets managed (trillions of dollars) =$0.74 $7.42 =$0.1(trillion of dollars) b).Advance decline line Advance decline line is a technique used by investors to analyze the trend of the market. Usually, it assesses the impact of new developments in the market and the reaction of the market if the new development is from the market. In cases where the prices of stock are very high, usually slopes downwards. It indicates the market is collapsing. In case, the gradient of the line is positive, it means that the market is doing well (Smart et al, 2014). New high-new lows indicator It indicates a change in stock prices usually a trading period of fifty-two weeks. It is one of the parameters that are used to measure the breath of a market. When a large amount of stock reaches the highest level in terms of its prices historically, it can be concluded that the stock issued are contributing towards strengthening the market. The market can be termed to be favourable when the observations made biased to the upside. Alternatively, the share prices considered to be declining when the number of new highs reported, and the number of new lows is even. The indicator can be applied to predict future performance of stock and the current prices. Investors use the strategy of purchasing shares the moment they attain new highs (Smart et al, 2014). Arms index The arms index is in predicting the expected prices of stocks in the future. In addition, it used to evaluate the relationship between the stocks whose prices are dropping with those rising. The total amount of shares traded is also used to predict the pattern of the market for the next trading periods. When the arms index value is above one, it implies that the prices are dropping. On the other hand, when the arms index value does not exceed one, it means that share prices are escalating. However, if the amount is equivalent to one, it is an indication that the supply and demand for the stock in the market are at the point of equilibrium (Smart et al., 2014). Mutual fund cash ratio The mutual fund cash ratio is a ratio between the cash held by an organization and its total assets. Usually, it is used to evaluate liquidity. When the rate is high, cash becomes high. On the other hand, when the ratio is low it implies the liquidity is also small. If it is price high, it suggests that the prices of stock are rising. If the rate is low, it means that the prices of stock are decreasing (Smart et al, 2014). c). Five periods have been used in presenting the data for Deb Forrester. The data represented appears to quarterly reports of the company. If they were long intervals of time, the data would have been describing the performance of the organization in one financial year. Therefore, the data would have been more detailed. In addition, the values reported would have been very high. At the close a trading year, corporate that performs similarly to Deb on quarterly reports record high figures at the end of the trading period. Investors use fiscal year’s reports to make a decision on whether they are going to buy or sell the stocks of the company. In addition, the dividends paid out to shareholders would have been included since it is only paid once in a year after receiving the necessary approval from the board of directors. If the period had been shorter, it could have made it difficult for investors to make decisions to buy or sell shares. A short time primarily presents limited information about the trends in the market. Consequently, entrepreneurs end up making unwise decisions. The length of the time affects the measured in different ways (Smart et al, 2014). Excel with spreadsheets A). Around the 27th April 2012, the upper hand of Amazon stock appears to have steadily risen from a point that appears to what seems to be a valley. Prior to the price of stock rising, it seems that it had a difficult time to break through. In the particular period, the stock tried to overcome the challenge but the market forces seemed to have blocked it forcing it to be stagnating in one particular point (MSN, 2015). B). During the next nine periods, the prices of the stocks kept on fluctuating as the days passed. In such instances, it becomes difficult for investors to make a decision on whether to buy or sell stocks because of uncertainty (MSN, 2015 D). The situation is not in line with what a technician may have predicted. It is hard to foresee (MSN, 2015). On 27 April 2012, the technician would have resulted into holding of the shares with the expectation its prices would rise for a short while (MSN, 2015). E).Around the same period, the lower band of Amazon stocks dropped (MSN, 2015). F).The Shares of Amazon rose steadily in the month of May 2012 (MSN, 2015). Market Efficiency and Behavioural Finance The prices of shares are supposed to represent the performance of an organization for the market to be considered efficient. In addition, investors should be in a position to predict the prices. Achieving the above objective is not an easy task. Most of the stock markets usually face asymmetric dissemination of information. Consequently, potential buyers are short-changed with those who receive insider information as to which stocks they are supposed to purchase. Capital markets authority should make access to information an essential right to all investors and potential entrepreneurs. When prices are predictable the decision-making process easier, hence increases the chances of buyers making profits. Once customers start making profits, the market will adjust itself accordingly so that consumers can make reasonable profits. Finally, a balance will be achieved where since no entrepreneurs will be making abnormal profits at the expense of other shareholders. In an efficient market, it becomes difficult to foretell the movement of prices for stocks. Precisely, the concept is known as a random walk. In an active market, information is frequently relayed immediately. Entrepreneurs can access information that is provided without biases so that they can make investment decisions. In addition, information regarding the future trends in the stock is contained in the share prices. According to EMH, the only factor that can affect the prices of stock is new information. Prices changes are random in nature and cannot easily be. It should be that information overload might not be healthy to make sound investment decisions. Therefore, some information might be irrelevant, and it may be unnecessary to disclose to entrepreneurs. A lot of care is supposed to exercise in determining information that needs to be to the users. For example, the entry of new players in the market may not interfere with markets that are. New firms do not have any influence in dictating the price trends in the market. Moreover, it is unnecessary to analyze stocks that are small, rather, large stocks are analyzed (Smart et al., 2014). The Efficient Market Hypothesis exists in a number of different forms depending on the amount information that is to interested parties. A weak form of EMH arises when investors can make a decision-based purely on previous performances or historical performance. The prediction can be based on the prices and the quantity of stocks traded. In such instances, it becomes needles to evaluate the trends that exist in the market. On the other hand, EMH is said to be semi-strong when information is available to the public although some information lacks. An example of information that may be lacking includes information regarding the quality of management an organization has. In a firm Efficient Market Hypothesis, an assumption is made that information relating to n organization is provided to every entrepreneur for them to make a decision. The information relayed includes that one held by insiders (Smart et al., 2014). In a weak form of EMH, it is very difficult to apply technical analysis to predict the future prices of stocks. Technical analysis depends on information from previous trading to predict the future prices of the shares. According to the Dow Theory, three forces are involved in technical analysis. They include primary, intermediate, and minor trends. Even if the market is efficient, that is not an end in itself. There is a need to have a sound management in place. A competent management team is responsible for drafting the strategic plans of an organization. The programs are developed bearing in mind the limited resources. Therefore, prudent decisions must be made on how the resources will be utilized to achieve optimal organizational performance. Hence, when the performance is favourable, it means that the share of the company may perform well (Smart et al, 2014). Market efficiency is a paramount concept because it allows for the utilization of resources correctly since the prices of shares accurately represent what is in the future. On the other hand, if the market was inefficient than wrong decisions made are. Making erroneous investment decisions may result in huge losses (Smart et al, 2014). Behavioural finance The field of behavioural finance takes into consideration ways in which investors make decisions. It is very common for entrepreneurs to rush to make decisions that have not been well thought. Consequently, they end up process information wrongly and end up receiving unfavourable returns. Lack of opportunities for the simultaneous buying and selling of assets in the different markets does not mean that the market is efficient. Under behavioural finance, errors occur during forecasting because entrepreneurs have a tendency of concentrating on the current performance of stocks. In addition, there is a possibility of overestimating the performance of inventory due to overconfidence. It is also possible that buyers may be adamant to change their beliefs and perceptions in line with current trends. Hence, conservatism is an issue that affects the decisions they make (Smart et al, 2014). In behavioural finance, biases’ arises from the decision-making process that is brought about, by the way, the decisions have been formulated, separation and avoiding regrets. Behavioural finance can be interpreted to mean that the prices of stocks are not right, and it is not easier to make-to-make profits. On the other hand, in Efficient Market Hypothesis, information is provided, and careful considerations have to be made to make profits. In an inefficient market natural opportunities to make profits exists. However, the difficult ability to predict the profits in the market does not translate that the market is on the right track. However, behavioural finance has a number of inconsistencies in terms of explanations (Smart et al, 2014). Reference List MSN, (2015).MSN: Amazon Incorporation. [15.2.2015]. Smart, S., Gitman, L., & Joehnk, M. (2014).Fundamentals of Investing. Pearson Education. Read More