market outline

Dow Jones Average

·        65 stocks

·        Dow Jones Industrial Average-30 stocks

·        Dow Jones Transportation Average-20 transportation stocks

·        Dow Jones Utilities average-15 utility stocks

Standard & Poor’s 500 Index

·        500 stocks

·        400 industrial stocks

·        20 transportation stocks

·        40 utility stocks

·        40 financial stocks

New York Stock Exchange

·        All industrial stocks on NYSE

·        All transportation stocks on NYSE

·        All utility stocks on NYSE

·        All financial stocks on NYSE

Moody’s average

·        200 stocks

·        125 industrial stocks

·        25 railroad stocks

·        25 utility stocks

·        15 bank stocks

·        10 insurance company stocks

Wilshire 5000 Total Market Index

·        6000 stocks found on NYSE, AMEX and NASDAQ

·        Retained Willshire 5000 name

·        Most extensive measure of market

·        Averages show course of market and change from past day, past years

The Wilshire 5000 Total Market Index is comprised of stocks found in which of the trading markets? NYSE, NASDAW, AMEX

Dow Theory

·        Market trends come before trends in prosperity/depression in general business

Odd lot theory

·        Small investor buys at high points

·        Small investor sells at low points

·        Anything under 1,000 shres is an odd lot

·        Odd-lot buys> odd lot sales, market decreases

·        Odd lot sales >odd lot buys, market increases

 

Advance decline theory

·        Increasing stocks vs. # of decreasing stocks

·        “let the trend be your friend”

·        If advance decline index rises more quickly>other index, market will rise

·        If advance decline index decreases more quickly than other index, market will fall

Short interest theory

·        Buy stock, long position, bullish

·        Short, borrow stock, borrow stock from B/D, sell borrowed stock

·        Many investors sell short

·        # of stocks sold short low, market is bearish

·        # of stocks sold short high, market is bullish

·        2008, Hedge funds shorted bank and broker/dealer stock into bankruptcy

Bull market

·        Bulls fight by swinging heads up

·        Market increasing

·        Own stock/long stock

·        Own calls/long calls

·        Write puts, sell puts, short puts

Bear

·        Bears swing down in a fight

·        Market decreasing

·        Sell stock short, short position

·        Buy put, long put

·        Write calls, short calls

Volatility

Alpha

·        volatility based on past volatility

·        Independent of market-related factors

·        Independent of a company’s stock price

·        1, no expected change

·        1.50, believe 50% increase

·        .75, believe 25% decline

·        High alpha, low risk

Beta

·        Stock price vs. stock market index movements

·        1, stock price will go up/down as market index rise/fall by same %age

·        Systematic risk, beta not 1, stock will move according to beta

·        Beta>1, more volatile than general market

·        Beta<1, stock will move less than market

 

Which of the following is considered to be a bearish position?

·        Short stock and long a put, investors want market to go down

Charting stock movements

·        Technical analysts use head and shoulders top formation and head and shoulders bottom formation

Head and shoulders top formation

·        Reversal of upward trend

·        Start of a bear market

 

Resistance and support levels

Resistance level:

·        highest level a stock will rise because of a price barrier

·        Level below which a stock will stay

·        When a stock reaches this level, selling increases because stock is high, decreased demand leads to falling price

Support level

·        Lowest level a stock will fall to because of a price barrier

·        Level above which a stock will stay

·        When price reaches level, buying occurs, price is low, increases demand, stock price increases

General points

·        Stock may not always hit barrier, can come close and reverse trend

·        When stock breaks barrier, then can be on way to next barrier

Breakout

·        When a stock goes above present resistance level on way to next resistance level

·        When a stock drops below a support level in sell-off, on way to next support level

Selling climax

·        Large-sell off of stock

·        Steady decline with little volume, then big drop with heavy volume

Which of the following is the best description of a resistance level?

·        The point below which a rising stock will stay. Goes up, hits, starts to go down. High points-resistance levels, low points-support levels until stock breaks through

Saucer stock movement

·        Bullish, Stock decreases in value, hit lowest point, now move up

·        Technical analysts put in buy orders on stock

Inverted saucer

·        Technical analysts put in sell orders on stock

 

 

Defensive issue

·        Equity that maintains price in an economic downturn

·        Food stocks

·        Liquor and tobacco stocks

Defense issue

·        Makes defense items

·        Aerospace

·        Airplane manufacturers

Bond analysis

Corporate bond analysis:

·        Fundamental analysts care about

·        Debt/equity ratio

·        Fixed charges coverage

Debt equity ratio:

·        Debt/equity

·        Funded debt compared to stock

Fixed charges coverage

·        Interest coverage: (Total revenues-expenses)/yearly interest

·        Debt service coverage: (Total revenues-expenses)/yearly interest and principal payment

·        Debt service: principal and interest

Municipal bond analysis

·        Analysts care about

·        Past performance in paying interest

·        Per capita income of population

·        Projected population growth of an area

·        Industrial development of an area

A corporation has revenues of $39 million. If the expenses are $17 million, principal payment is $8 million and the interest expenses is $2 million, what is the debt service coverage? 2.2x. (39-17)=22. 22/(2+8)=2.2

Investment techniques

Long position

·        Investor believes market will rise because of demand

·        Hope to buy low and sell high

·        Bullish, thinks the market will rise

Short position

·        Investor believes market will fall

·        First sell security, then buy security to replace what was borrowed

·        Sell stock, bond, call option, hope to buy security later at a lower price

Short against the box

·        Two different positions

·        Investor owns stock, sells it short

·        Defer taxes on profit to next year

·        Banned: use to lock in profits and reduce taxes

Arbitrage

·        Take advantage of a price difference on one stock in 2 markets or between 2 securities

·        Buy in one market, sell short in another market

·        If sale is not a short sale, both transactions must be paid for

·        Day-trading: constant buying and selling of securities, attempt to time market movement, 4 trades in a 5 day period

·        Buy convertible bond when bond and stock prices unequal, “bond is selling below parity” or “stock is selling above parity with bond” investor buys bond, converts into stock, sell stock>purchase of bond cost

·        If bond sells above parity, arbitrage isn’t possible because investor cannot buy stock, convert stock into bond and sell bond at a higher price

Which of the following is an arbitrage using a convertible bond?

·        When the bond is selling at a discount to parity with the stock. If the bond is lower than parity with the stock or “the stock is selling above parity with the bond” the investor can buy the bond, convert and sell the stock and make a profit