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  • 📋ChartSchool
  • Table of Contents
    • Overview
      • Why Analyze Securities?
      • Technical Analysis
      • Fundamental Analysis
      • Random Walk vs. Non-Random Walk
      • Asset Allocation and Diversification
      • John Murphy's 10 Laws of Technical Trading
      • John Murphy's "Charting Made Easy" eBook
      • Technical Analysis 101
        • TA 101 – Part 1
        • TA 101 – Part 2
        • TA 101 – Part 3
        • TA 101 – Part 4
        • TA 101 – Part 5
        • TA 101 – Part 6
        • TA 101 – Part 7
        • TA 101 – Part 8
        • TA 101 – Part 9
        • TA 101 – Part 10
        • TA 101 – Part 11
        • TA 101 – Part 12
        • TA 101 – Part 13
        • TA 101 – Part 14
        • TA 101 – Part 15
        • TA 101 – Part 16
        • TA 101 – Part 17
      • Irrational Exuberance
      • Cognitive Biases
      • Arthur Hill on Goals, Style and Strategy
      • Arthur Hill on Moving Average Crossovers
      • Multicollinearity
      • "The Trader's Journal" by Gatis Roze
        • Stage 1: Money Management
        • Stage 2: Business of Investing
        • Stage 3: The Investor Self
        • Stage 4: Market Analysis
        • Stage 5: Routines
        • Stage 6: Stalking Your Trade
        • Stage 7: Buying
        • Stage 8: Monitoring Your Investments
        • Stage 9: Selling
        • Stage 10: Re-Examine, Refine, Re-Enhance
        • Additional Reading
      • Bob Farrell's 10 Rules
      • Richard Rhodes' Trading Rules
      • Donchian Trading Guidelines
      • Why and How To Use Correlation
    • Chart Analysis
      • What Are Charts?
      • Support & Resistance
      • Trend Lines
      • Gaps and Gap Analysis
      • Introduction to Chart Patterns
      • Chart Patterns
        • Broadening Top or Megaphone Top
        • Double Top Reversal
        • Double Bottom Reversal
        • Head and Shoulders Top
        • Head and Shoulders Bottom
        • Falling Wedge
        • Rising Wedge
        • Rounding Bottom
        • Triple Top Reversal
        • Triple Bottom Reversal
        • Bump and Run Reversal
        • Flag, Pennant
        • Symmetrical Triangle
        • Ascending Triangle
        • Descending Triangle
        • Rectangle
        • Price Channel
        • Measured Move—Bullish
        • Measured Move—Bearish
        • Cup With Handle
      • Chart Types
        • Arms CandleVolume
        • CandleVolume
        • Elder Impulse System
        • EquiVolume
        • Heikin-Ashi Candlesticks
        • Kagi Charts
        • Renko Charts
        • Three Line Break Charts
        • MarketCarpets
        • Relative Rotation Graphs (RRG Charts)
        • Seasonality Charts
        • Yield Curve
      • Candlestick Charts
        • Introduction to Candlesticks
        • Candlesticks and Traditional Chart Analysis
        • Candlesticks and Support
        • Candlesticks and Resistance
        • Candlestick Bullish Reversal Patterns
        • Candlestick Bearish Reversal Patterns
        • Candlestick Pattern Dictionary
      • Point and Figure Charts
        • Point and Figure Basics
          • Introduction to Point & Figure Charts
          • Point & Figure Scaling and Timeframes
          • P&F Trend Lines
        • Classic Patterns
          • P&F Bullish Breakouts
          • P&F Bearish Breakdowns
          • P&F Signal Reversed
          • P&F Catapults
          • P&F Triangles
          • P&F Bull & Bear Traps
        • P&F Price Objectives
          • P&F Price Objectives: Breakout and Reversal Method
          • P&F Price Objectives: Horizontal Counts
          • P&F Price Objectives: Vertical Counts
        • Point & Figure Indicators
        • P&F Scans and Alerts
          • P&F Pattern Alerts
      • Chart Annotation Tools
        • Andrews' Pitchfork
        • Stock Market Cycles
        • Fibonacci Retracements
        • Fibonacci Arcs
        • Fibonacci Fans
        • Fibonacci Time Zones
        • Quadrant Lines
        • Raff Regression Channel
        • Speed Resistance Lines
    • Technical Indicators & Overlays
      • Introduction to Technical Indicators and Oscillators
      • Technical Indicators
        • Accumulation/Distribution Line
        • Alligator Indicator
        • Aroon
        • Aroon Oscillator
        • ATR Bands
        • ATR Trailing Stops
        • Average Directional Index (ADX)
        • Average True Range (ATR) and Average True Range Percent (ATRP)
        • Balance of Power (BOP)
        • Bollinger BandWidth
        • %B Indicator
        • Chaikin Money Flow (CMF)
        • Chaikin Oscillator
        • Chande Trend Meter (CTM)
        • CMB Composite Index
        • Commodity Channel Index (CCI)
        • ConnorsRSI
        • Coppock Curve
        • Correlation Coefficient
        • DecisionPoint Price Momentum Oscillator (PMO)
        • Detrended Price Oscillator (DPO)
        • Distance From Highs
        • Distance From Lows
        • Distance To Highs
        • Distance To Lows
        • Distance From Moving Average
        • Ease of Movement (EMV)
        • Force Index
        • Gopalakrishnan Range Index
        • High Low Bands
        • High Minus Low
        • Highest High Value
        • Linear Regression R2
        • Lowest Low Value
        • Mass Index
        • MACD (Moving Average Convergence/Divergence) Oscillator
        • MACD-Histogram
        • MACD-V
        • MACD-V Histogram
        • Median Price
        • Money Flow Index (MFI)
        • Negative Volume Index (NVI)
        • On Balance Volume (OBV)
        • Percentage Price Oscillator (PPO)
        • Percentage Volume Oscillator (PVO)
        • Performance Spread
        • Price Relative/Relative Strength
        • Pring's Know Sure Thing (KST)
        • Pring's Special K
        • Rate of Change (ROC)
        • Relative Strength Index (RSI)
        • Relative Volume (RVOL)
        • RRG Relative Strength
        • StockCharts Technical Rank
        • Slope
        • Standard Deviation (Volatility)
        • Stochastic Oscillator (Fast, Slow, and Full)
        • StochRSI
        • Traffic Light
        • TRIX
        • True Range
        • True Strength Index
        • TTM Squeeze
        • Typical Price
        • Ulcer Index
        • Ultimate Oscillator
        • Vortex Indicator
        • Weighted Close
        • Williams %R
      • Technical Overlays
        • Anchored VWAP
        • Bollinger Bands
        • Chandelier Exit
        • Double Exponential Moving Average (DEMA)
        • Hull Moving Average (HMA)
        • Ichimoku Cloud
        • Kaufman's Adaptive Moving Average (KAMA)
        • Keltner Channels
        • Linear Regression Forecast
        • Linear Regression Intercept
        • Moving Averages—Simple and Exponential
        • Moving Average Ribbon
        • Moving Average Envelopes
        • Parabolic SAR
        • Pivot Points
        • Price Channels
        • Triple Exponential Moving Average (TEMA)
        • Volume-by-Price
        • Volume-Weighted Average Price (VWAP)
        • ZigZag
    • Market Indicators
      • Introduction to Market Indicators
        • Market Indicator Dictionary
      • Advance-Decline Line
      • Advance-Decline Percent
      • Advance-Decline Volume Line
      • Advance-Decline Volume Percent
      • Arms Index (TRIN)
      • Bullish Percent Index (BPI)
      • DecisionPoint Intermediate-Term Breadth Momentum Oscillator (ITBM)
      • DecisionPoint Intermediate-Term Volume Momentum Oscillator (ITVM)
      • DecisionPoint Swenlin Trading Oscillator (STO)
      • High-Low Index
      • High-Low Percent
      • McClellan Oscillator
      • McClellan Summation Index
      • Net New 52-Week Highs
      • Percent Above Moving Average
      • Pring's Bottom Fisher
      • Pring's Diffusion Indicators
      • Pring's Inflation and Deflation Indexes
      • Pring's Net New High Indicators
      • Put/Call Ratio
      • Record High Percent
      • Volatility Indices
    • Market Analysis
      • Dow Theory
      • Sector Rotation Analysis
      • Intermarket Analysis
      • The DecisionPoint Chart Gallery
      • DecisionPoint Rydex Asset Analysis
      • Wyckoff Analysis Articles
        • Wyckoff Market Analysis
        • Wyckoff Stock Analysis
        • The Wyckoff Method: A Tutorial
      • Elliott Wave Analysis Articles
        • Introduction to Elliott Wave Theory
        • Identifying Elliott Wave Patterns
        • Guidelines for Applying Elliott Wave Theory
    • Trading Strategies & Models
      • DecisionPoint Trend Model
      • Trading Strategies
        • Bollinger Band Squeeze
        • CCI Correction
        • CVR3 VIX Market Timing
        • Faber's Sector Rotation Trading Strategy
        • Gap Trading Strategies
        • Harmonic Patterns
        • Hindenburg Omen
        • Ichimoku Cloud Trading Strategies
        • The 'Last' Stochastic Technique
        • MACD Zero-Line Crosses With Swing Points
        • Moving Average Trading Strategies
          • Finding Support and Resistance in Moving Averages
          • Guppy Multiple Moving Average: An MA Ribbon Designed to Tip the Market’s Hand
          • How To Trade Price-to-Moving Average Crossovers
          • Trading the Bounce: Finding Support and Resistance in Moving Averages
          • Trading the Death Cross
          • Trading Using the Golden Cross
          • Using the 5-8-13 EMA Crossover for Short-Term Trades
        • Moving Momentum
        • Narrow Range Day NR7
        • Percent Above 50-day SMA
        • Percent B Money Flow
        • The Pre-Holiday Effect
        • RSI(2)
        • Six-Month Cycle MACD
        • Slope Performance Trend
        • Stochastic Pop and Drop
        • Swing Charting
        • Trend Quantification and Asset Allocation
    • Index & Market Indicator Catalog
      • Advance-Decline Indicators
      • Cboe Indices and Indicators
      • CME Futures and Spot Prices
      • DecisionPoint Sentiment Indicators
      • Dow Jones Breadth Indicators
      • Dow Jones Global Indices
      • Dow Jones Select Indices
      • Dow Jones Titans Indices
      • Dow Jones US Indices
      • Economic Indicators
      • ICE Futures and Spot Prices
      • Intellidex Indices
      • MSCI Indices
      • New 52-week Highs and Lows for Exchanges
      • NYSE Arca Equity Indices
      • NYSE Equity Indices
      • Philadelphia Indices
      • S&P 500 Sector and Industry Groups
      • S&P GSCI Indices
      • StockCharts AD Percent
      • StockCharts AD Volume Percent
      • StockCharts Bullish Percent Index
      • StockCharts High-Low Index
      • StockCharts High-Low Percent
      • StockCharts Percent Above Moving Average
      • StockCharts Pseudo Symbols
      • StockCharts Record High Percent
      • StockCharts Theoretical Indices
      • US Treasury Yields
    • 📖Glossary
      • 📖Glossary - A
      • 📖Glossary - B
      • 📖Glossary - C
      • 📖Glossary - D
      • 📖Glossary - E
      • 📖Glossary - F
      • 📖Glossary - G
      • 📖Glossary - H
      • 📖Glossary - I
      • 📖Glossary - J
      • 📖Glossary - K
      • 📖Glossary - L
      • 📖Glossary - M
      • 📖Glossary - N
      • 📖Glossary - O
      • 📖Glossary - P
      • 📖Glossary - Q
      • 📖Glossary - R
      • 📖Glossary - S
      • 📖Glossary - T
      • 📖Glossary - U
      • 📖Glossary - V
      • 📖Glossary - W
      • 📖Glossary - X, Y, Z
    • Options Glossary
    • Educational Resources
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On this page
  • Security Analysis: Does it Matter?
  • Are Markets Efficient?
  • Strong Form: Technicians
  • Semi-Strong Form: Random Walkers
  • Weak Form: Fundamentalists
  • Which Form Exists in the Market Today?
  • After Reporting Earnings Below Expectations
  • After Positive Guidance

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  1. Table of Contents
  2. Overview

Why Analyze Securities?

Understand the stock market with this comprehensive guide on why analyzing securities is essential for any investor. Dive into the different analysis techniques and make informed investment decisions.

PreviousOverviewNextTechnical Analysis

Last updated 11 months ago

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Security Analysis: Does it Matter?

Wall Street has tons of analysts, strategists, and portfolio managers hired to do one thing: beat the market. Analysts are hired to find undervalued stocks. Strategists are hired to predict the direction of the market and various sectors. Portfolio managers are hired to put it all together and outperform their benchmark, usually the S&P 500 index. Granted, there are many studies and disputes raging on the performance of equity mutual funds, but it's safe to assume that about 75% of equity mutual funds underperform the S&P 500. With these kinds of stats, wouldn't individual investors be better off simply investing in an index fund rather than attempting to beat the market?

There are different ways to analyze the market. The added value of analysis is in the eye of the beholder:

  • A believes that analyzing strategy, management, product, financial statistics, and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market. They are also likely to believe that there's little-to-no value in analyzing past prices and that technical analysts would be better off stargazing.

  • The believes that the chart, volume, momentum, and an array of mathematical indicators hold the keys to superior performance. Technicians are just as likely to believe that fundamental data is complete hogwash.

  • And then there are the who believe that any attempt to try and outwit the market is futile.

So whom do you believe? Is fundamental analysis worth the time and effort? Are technicians a bunch of quacks? Or is it all a lesson in random futility? We can begin to answer these questions by looking at the efficient market hypothesis and seeing where the fundamentalists, technicians, and random walkers stand regarding market efficiency. After we have explored this area, we will then take a closer look at the random walk theory, fundamental analysis, and technical analysis.

Are Markets Efficient?

The debate concerning the value of analysis begins with the question of market efficiency. What does the price of a stock or security represent? Is a security's current price an accurate reflection of its fair value? Do anomalies exist that allow traders and investors the opportunity to beat the market by finding undervalued or overvalued securities?

There are different definitions of an efficient market. Aswath Damodaran, of the Stern Business School at New York University defines an efficient market as one in which the market price is an unbiased estimate of the true value of the investment. That's true, but it's also an oversimplification. In an efficient market, the current security price fully reflects all available information and is the fair value.

In this ideal scenario, the price is the sum value of all views (bullish, bearish, or otherwise) held by market participants. As new information becomes available, the market assimilates the information by adjusting the security's price up (buying) and down (selling). So, the price is the fair value because the market agreed on a price to buy and sell the security. In an efficient market, deviations above and below fair value are possible, but these deviations are considered to be random. Over the long run, the price should accurately reflect fair value.

The hypothesis also asserts that if markets are efficient, then it should be virtually impossible to outperform the market on a sustained basis. Even though deviations will occur and there will be periods when securities are overvalued or undervalued, these anomalies will disappear as quickly as they appeared, thus making it almost impossible to profit from them.

From experience, most investors would agree that the market isn't perfectly efficient: anomalies exist, and some investors and traders outperform the market. There are varying degrees of market efficiency which have been broken down into three levels. These three levels also happen to correspond to the beliefs of fundamentalists, technicians, and random walkers.

Strong Form: Technicians

The Strong Form of market efficiency theorizes that the current price reflects all information available. It doesn't matter if this information is available to the public or privy to top management; if it exists, it's reflected in the current price. Because all possible information is already reflected in the price, investors and traders will not be able to find or exploit inefficiencies based on fundamental information. Generally, pure technical analysts believe that the markets are Strong Form efficient and all information is reflected in the price.

Semi-Strong Form: Random Walkers

The Semi-Strong form of market efficiency theorizes that the current price reflects all readily available information. This information will likely include annual reports, SEC filings, earnings reports, announcements, and other relevant information that can be readily gathered. Yet, all information isn't readily available to the public which means that all information isn't fully reflected in the price. This could be information held by insiders, competitors, contractors, suppliers, or regulators, among others. Anomalies exist when information is withheld from the public, and the only way to profit is by using information not yet known to the public. This is sometimes called insider trading. Once this information becomes public knowledge, prices adjust instantaneously, making it virtually impossible to profit from such news. The Random Walk theory is an example of the Semi-Strong Form of market efficiency.

Weak Form: Fundamentalists

The Weak Form of market efficiency theorizes that the current price doesn't reflect the fair value and is only a reflection of past prices. In addition, the future price can't be determined using past or current prices (sorry technical analysts). Fundamental analysts are champions of Weak Form market efficiency and believe that the true value of a security can be ascertained through financial models using information readily available. The current price will not always reflect fair value; these models will help identify anomalies.

Which Form Exists in the Market Today?

Many in academia believe that security prices are semi-strong efficient. Recall that "semi-strong efficient" implies that all public knowledge is reflected in the price, and it's virtually impossible to exploit deviations from the true value based on public information. Only new information will affect the price.

Judging from the reaction of many stocks to news events, there seems to be evidence to support this case. The flow of information has become faster and new developments are factored in instantly. A surprise, positive or negative, can violently move the price of a security. A few examples include:

After Reporting Earnings Below Expectations

After announcing weak guidance during its earnings call on February 9, 2023 (after the close), Lyft shares fell from $16.22 to close at $10.31 the following trading day.

After Positive Guidance

Even though NVDA reported slightly higher revenue and net income in their Q4 earnings report on February 22, 2023, strong guidance saw NVDA stock gap up from $207.50 to close at $236.60 the following trading day.

These are just a few examples but they demonstrate how new information can move the price of a security in non-random ways.

fundamental analyst
technical analyst
Random Walkers
Is there information in stock prices?
Price action after weak guidance from an earnings release.
NVDA's stock price rose after strong guidance during an earnings call.
Candlestick chart from StockCharts.com showing whether a candlestick bar provides information on price action
Candlestick chart from StockCharts.com showing prices falling after weak guidance from an earnings call