2) Semi-strong EMH states that security prices are fully reflect all publicly available information about the stocks market. As such when new information is made public, the information includes past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earning forecasts, and accounting practices. This information to affect the expectation of investor, it will be reflected in security’s price.
3) Strong-form EMH states that current security prices are fully reflect all known information about the securities markets including that which is inside information. This implies that the markets respond very quickly, that even someone with the most valuable piece of information can not to make profit from the stock trade.
The assumption of EMH
If the market is efficient, it should have following reason.
The first is freely and instantly available of information, the second is Products and expectation is unique, the third there have larger numbers of buyers and sellers to create perfect competition. The forth is the investor act is reasonable also without transaction cost and taxes.
The implication of EMH for investment management
Active and Passive Portfolio Management
In the weak form of EMH current security prices are fully reflect all information contained in the past history of security prices such as the history of past prices, trading volume. Therefore active management is possible to use technical analysis to earn the excess profit from weak form efficiency market. Active managers will outperform.
In the strong of EMH investor only can use passive buy-and-hold strategy. Because private and public information is random to appear also security prices are fully reflect all known information about the securities markets. This implies that the markets respond very quickly, investors can not use this information to make profit from the stock trade. Therefore the best portfolio strategic is passive management such as create an index fund, which is a fund designed to following the benchmark index of stock.
Technical analysis
Technical analysis attempts to use recurring and predictable patterns in stock prices to generate superior investment performance. Technicians believe that whatever the fundamental reason for change in stock price, if the stock price responds slowly enough, the analyst will be able to identify a trend that can be use during the adjustments period.
The key to successful technical analysis is slow response of stock prices to fundamental supply and demand factors.
Technical analysts study records or charts of past stock prices, hoping to find patterns they can use to make profit.
Technicians do not deny the value of fundamental information, but believe that prices only gradually close in on intrinsic value. As fundamentals shift, astute traders can exploit the adjustment to a new equilibrium.
Much of technical analysis seeks to uncover trends in market prices. This is in effect a search for momentum. Momentum can be absolute, in which case one searches for upward price trends, or relative, in which case the analyst looks to invest in one sector over another. Relative strength statistics are designed to uncover these perceived opportunity
Technical analysis also uses volume data and sentiment indicators. These are broadly consistent with several behavioral models of investor activity.
Technical Analysis Assumption
1. According to technical analysis market value of stock is determined by the supply and demand for a stock which in turn is governed by several factors which can be rational or irrational and not by intrinsic value of stock.
2. Stock prices tend to move in trends which continue for a substantial period of time so if there is a bull market going on then minor corrections is treated as opportunity to buy by technical analyst.
3. Also change in trends in market can be detected sooner or later and hence substantial profits can be made.
4. Technical analysis depends more on market related information such as stock prices volume of trading, sentiments of general public then on information in the financial statements like balance sheet or profit and loss account.
Hence it can be said that technical analysis is not based on any strong conceptual framework but rather it is based on use of past movement of stock prices to predict future prices.
Critically illustrate whether market efficiency and technical analysis no actually exclusive
In this part I use two general technical analyses named RSI and Bollinger bands.
I use these two technical analyses indicator apply to 1 year Hang Seng Index.
Hong Kong is a weak form of EMH which is efficiency market; therefore we can use technical analyses to make the excess money .There have two examples to explain market efficiency and technical analysis no actually exclusive
Bollinger bands
Bollinger Bands have three lines. The middle one is number of days of moving average. The upper and lower line is middle multiplied by 2 that standard deviation. Upper line is the value multiplied by +1 and lower line is the value multiplied by -1.
It is use to identify the price is high or low .If the price is touching the top of
Bollinger Bands that means the stock price is too high .The price will have more chance to fall. If the price is touching the lowest of Bollinger Bands that means the stock price is too low .The price will have more chance to rebound
Relative Strength Index
It is an indicator based on the closing prices of completed trading periods. This is a relationship between the average percent raise and the average percent fall of a stock price during a market period .Usually people use 9 days or 14 days. Take 14 days for estimate the stock prices movement.
RSI is between 0 to 100 .If lower than 30 is oversold and higher than 70 is overbought. For example the stock price is go up very fast then the index also go up very fast to 70or above. If the index is up to 70 above that means the stock is overbought then the price may be drop down at soon. If you buy a stock at that time you are very dangerous. Conversely, the stock is oversold. The stock prices may be rebound soon. You should buy stock at this moment.
This chart I apply Bollinger Bands to 1 year HSI .We can see that when HSI .If the price is touching the top of Bollinger Bands. The price will drop and if the price is touching the lowest of Bollinger Bands that means the stock price is too low .The price will rebound .Which mean that in Hong Kong market we can use this technical indicator to actively management the portfolio such as sell at top of Bollinger Bands and buy at lowest of Bollinger Bands.
This chart I apply Relative Strength Index to 1 year HSI
According the chart we can see that when HIS is overbought then the price may be drop down at soon. Conversely, the HSI is oversold. The stock prices may be rebound soon. Therefore we can buy at oversold and sell at overbought to earn the money.
Reference
