1. MARKET EFFICIENCY - THREE FORMS
Weak form - random walk
past prices hold no information about future prices
can't beat buy/hold strategy
much evidence to support including correlation
tests, filter test - fail
Semi-strong form
all publicly available information is immediately
reflected in price.

2. SEMI-STRONG FORM subsumes weak form since price data is publicly
available
assumes rational investors seek information
impound quickly.
result - prices may rise or fall with few trades - few
chances to make money
quite a bit of information such as stock split and earnings information are impounded quickly.
EXAMPLE: Yield curve misalignment in US. Treasury market - takes 15 seconds to correct.

3. STRONG FORM all relevant information reflected in stock prices
due to insiders, specialists
evidence shows announcements of important
information often anticipated beforehand.
implies outside investors should buy and hold
market.

5. MARKET EFFICIENCY - PROPERTIES
Market is not always correct - just unbiased and usually close to correct
Price changes are independent and random - prices adjust rapidly to new information
Much available information
Liquidity - price continuity - SEC & Fed watches
Low transaction costs

6. IMPLICATIONS OF MARKET EFFICIENCY
Investors should
define risk level
hold a diversified portfolio that is a combination of
the market portfolio and risk free assets
minimize trading transaction costs
Example: May 27, 1968, submarine USS Scorpion declared missing with 99 men within a 20 mile circle of Atlantic ocean. After 5 months searching, it could not be found. Navy scientist, John Craven found the sub after asking 30 submarine salvage experts to guess where it was based on the data available. They found the sub 220 yards away from the average guess (no one survived).
Do Bean Jar – if too many students – assume 50 above and 50 below true value as the range where the average guess falls. Ask them to raise hands – who thinks below X, who thinks above Y

7. THREE FACTORS MAKE IT DIFFICULT TO TELL WHETHER THE MARKET IS EFFICIENT
Market variance is so large, superior investment
performance must be very large before it is
statistically significant.
Selection bias - those with profitable investment rules do not reveal them, hence, we can't be sure that some
managers are profitable. – Note Broker’s Trick.
Luck - by chance some will have superior performance.
QUESTION: Some stocks have very high returns and others very low returns even after adjustment for risk. Is this evidence of market inefficiency? No, because some firms may do surprisingly well for some periods.

8. TECHNICAL ANALYSIS Fundamental analysis - what we've done up to
now - economy, industry, company information.
Technical analysis - use past price and trading
volume to predict future price.
Technical Analysis is popular, perhaps because it is very visual and intuitive - analysts use charts

9. DOW THEORY - BEST KNOWN TECHNICAL THEORY
THREE TIME TRENDS
primary trend
intermediate trend
short term corrections - day to day
TWO DIRECTIONAL TRENDS
bull trend - higher highs
bear trend - lower lows

13. The Dow Transport index should make similar movements to the dow industrials to confirm trends.
QUESTION: What is the rationale for this? Goods
transported before being sold so transportation stocks move first.
QUESTION: Why do fewer technical analysts rely on transport confirmation? Service sector growth

14. VOLUME ANALYSIS - SUPPLY/DEMAND
Large volume signals turning points followed by weak volume.
Volume goes with trend
Bull market - prices up on high volume
-prices down on low volume
Bear market -prices up on low volume
-prices down on high volume

15. PROBLEMS WITH DOW THEORY
Often late in identifying major trends
Not much help for short term trader - or which stocks to buy.

16. BASIS FOR TECHNICAL ANALYSIS
Supply-demand determine price
Both supply & demand are affected by rational and
irrational factors.
Prices move in trends - trends persist because price
adjustments to new information takes time

17. INVESTMENT ADVANTAGES OF TECHNICIANS
Aren't required to get good fundamental information and process quickly, this is difficult.
Just interpret price and volume movements to get information indirectly, don’t care about what a company does.
No need to decipher financial statements that are biased.

18. OTHER TECHNICAL THEORIES
Short interest - signals latent demand - not supported
Odd lot Theory - small investors trade incorrectly
- not supported
New High / New Low - Bull => increase New high, decrease new low lagging, not leading indicator
Moving average - compare to actual, a momentum
indicator like rate of change analysis
- when actual falls below rising average - bear
- when actual rises above rising average - bull
Advance / Decline (Breadth)- a reading of general market

19. Mutual Fund Cash Position - latent demand - actually a
concurrent indicator.
Contrary opinion - must be different to make money -
evidence? - only at certain times.
Call / Put ratio - usually more calls - increase in puts is
bearish.
Inside Information Indicators
- insider sell / buy ratio - since many companies pay
in shares - expect some to sell, if none sell - bullish
- buy / sell differential by NYSE members
- short selling by specialists

20. TECHNICAL ANALYSIS CAN BE APPLIED TO INDIVIDUAL STOCKS
PRICE LEVELS
resistance levels
support levels
PRICE FORMATIONS
hard to tell one from another
their use reflects individuals effort to see pattern in randomness, tests show people see patterns in random generated pictures general trends and sideways movements

22. Websites for Technical Analysis
1. Futuresource.com – has examples of formations and trendlines.
2. Prophetfinance.com – use Prophet JavaCharts for drawing in trendlines – interactive.
3. Stockcharts – has MarketCarpets that give a visual of how sectors are doing day-to-day.