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Taking Stock -Barbican Asset Management

A technical analysis of investing

TECHNICAL analysis is an art which tries to identify some trends in the price of a stock at an early stage and then tries to maintain an investment strategy until there is s

trong evidence of the reversal of the trends.


One author said: “The market is more challenging, fulfilling, and rewarding to resourceful investors willing to learn the art of cyclical timing through a study of technical analysis.” To be successful, technical analysis requires patience, objectivity and discipline to acquire an asset during periods of depression and dispose it in an environment of excessive optimism.


Structure


Generally speaking, technical analysis can be split into three important areas that are sentiment, flow of funds and market structure.


Sentiment indicators: These are also known as expectation indicators and are derived from monitoring the actions and emotions of market participants.

The major assumption behind these indicators is that different groups of investors act consistently in cases of significant market turning points.


Flow of funds indicators: These relate to the analysis of the financial position of various investor groups. This is done in an effort to try and establish the investor’s potential capacity to buy or sell stocks.

Market structure indicators: These monitor the trend of various price indexes, market breath, cycles, volumes to mention a few, in order to make a valuation on the state of bear and bull markets.


Price movements may be classified as primary, intermediate, and short-term.

Primary (cyclical) movements typically show themselves out in a period of one to three years reflecting investors’ attitudes toward the business cycle.

On the other hand, intermediate movements usually develop over a period of at least three months to several months while short-term movements are for any period less than three to four weeks.


The equities market


High levels of volatility have characterised the Zimbabwean equities market.


The industrial index began the year 2003 at 103 495.09 and peaked at 754 604.01 on August 28.


However, the index closed the year 2003 at 401 542.93. This goes to reflect the high levels of volatility of the stock market.


Of interest has been the asymmetry in the manner in which the market responds to announcements by listed counters.


This had been mainly witnessed in the financial sector where positive information about a counter is not fully rewarded in the form of a corresponding share price increase.


However in cases of adverse developments or any other negative information about a counter, we have seen the market heavily punishing the respective counters. This will form part of the sentiment indicators analysis. The investors’ sentiment is that of taking on a risk that offers a relative return in whatever type of investment they take.


Recently, the stock market had been adversely affected by other economic factors such as the high rates of interest, which had been prevailing on the money market. This had a strong negative impact on the stock market as most investors shifted their resources to the money market.


On the other hand, those institutions with cash or the potential to purchase counters had also to shift their attention to the rewarding money market, an analysis of the flow of funds indicators.


The festive season is associated with high spending for both the individual and institutional investors. Resultantly, we have witnessed a trend whereby during this period the market will become cheap.


Thus prices on the stock market have always been dampened during this period. Such developments yield to the market structure indicators analysis.

Most counters trading on the Zimbabwe Stock Exchange (ZSE) have their year-end of December.


According to ZSE regulations they are required to publish their financial results within the first quarter of the year. These results have been known to have a major impact on the prices of the respective counters.


Thus sentiment, as well as market structure analysis will play a pivotal role when it comes to the technical analysis approach.


There has been a general sentiment that demergers unlock value to shareholders. As a result if a counter were to issue a cautionary statement relating to a demerger, the counter is known to respond in a positive direction. On the other hand investors have a negative perception on counters which are highly geared.


This comes in the wake of the prevailing high interest rates on borrowing.


Conclusion


It should be noted that our market is volatile and inefficient. As a result of these distortions, trends may be difficult to establish. However, if the method of technical analysis is used with extreme caution and care, good investment decisions will yield.


It should be noted that because of the volatility and inefficiency of our market, good investment decisions should not be made using technical analysis alone.


They have to be complemented by other methods such as fundamental analysis.

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