1. Behavioral Finance and Technical Analysis
CHAPTER 19

2. Behavioral Finance
Traditional theory ignores some aspects of personal behavior
Behavioral finance tries to incorporate personal behavior to extend corporate finance
Behavioral finance is a developing area

3. Individual Behavior Cooperation and Altruism
Bidding and the Winner’s Curse
Endowment Effect, Status Quo Bias and Loss Aversion
Mental Accounts

4. Figure 19-1 Loss Aversion Preference Function

5. Asset Returns and Behavioral Explanations
Calendar effects
Cash dividends
Overreaction and mean reversion

6. Explanations that Fail the Empirical Test
Controversial explanations from behavioral finance
Closed-end fund pricing
Excess volatility in stock prices
Loss Aversion and CBOT Traders

7. Charting Dow theory Point and figure charts Candlestick charts
Actual versus simulated results

8. Figure 19-2 Dow Theory Trends

9. Figure 19-3 Dow Jones Industrial Averages in 1988

10. Figure 19-4 Point and Figure Chart for Table 19-2

11. Table 19-2 Stock Price History

12. Figure 19-5 Point and Figure Chart for Atlantic Richfield

13. Figure 19-6 Candlestick Chart

14. Figure 19-7 Actual and Simulated Stock Prices for 52 Weeks

15. Figure 19-8 Actual and Simulated Changes in Weekly Stock Prices for 52 Weeks

16. Sentiment Indicators Trin Statistics If Trin > 1.0 bearish signal
# Advancing / # Declining
Volume Advancing / Volume Declining
# Declining / Volume Declining
# Advancing / Volume Advancing
If Trin > 1.0 bearish signal

17. Sentiment Indicators Put / Call Ratio Mutual Fund Cash Position
Historical value 65%
When higher than 65% a signal occurs
Bearish view
Bullish view
Mutual Fund Cash Position
Cash levels are low - bearish sign
Cash levels are high - bullish sign

18. Sentiment Indicators Odd - Lot Trading
Ratio of odd-lot purchases to odd-lot sales
When ratio exceeds 1.0, bearish sign
Contrarian logic - small investors are the last to buy in bull markets

19. Flow of Funds Indicators
Short Interest - total number of shares that are sold short
When short sales are high a signal occurs
Bullish interpretation
Bearish interpretation
Credit Balances in Brokerage Accounts
Investor leave balances when they plan to invest in the future
When levels are high a bullish sign

20. Market Structure Indicators
Moving Averages
Average price over some historical period (5 weeks or 200 days)
When current price crosses the average a trading signal occurs
Bullish signal when the current price rises above the moving average
Bearish sign when the current price falls below the moving average

21. Figure 19-10 Moving Average for Microsoft

22. Figure 19-11 Moving Averages

23. Market Structure Indicators
Breadth
The extent to which movements in a broad index are reflected widely in movements of individual stocks
Spread between advancing stocks and declining stocks
Also used in industry indexes

24. Table 19-4 Breadth

25. Figure Cumulative Difference in Returns of Previously Best and Worst Ranking Stocks in Subsequent Months

26. Value Line System
Widely followed with some evidence of superior performance
Value Line System is predominately a technical system
Earnings momentum
Relative stock prices
Ratios of moving averages

27. Figure Record of Value Line Ranking for Timeliness (without adjustment for change in rankings)

28. Value Line System
Paper vs actual performance indicates that the system is difficult to implement
Value Line Fund has not shown superior performance
High turnover costs are associated with the strategy
Evidence shows prices react quickly to reported ranking changes