VALIDITY OF FUNDAMENTAL AND TECHNICAL ANALYSIS Thangjam Ravichandra* 1, Ridhima Mehta 2. India. India.

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1 ISSN: IJMRR/Oct. 215/ Volume 5/Issue 1/Article No-23/ Thangjam Ravichandra et.al.,/ International Journal of Management Research & Review VALIDITY OF FUNDAMENTAL AND TECHNICAL ANALYSIS Thangjam Ravichandra* 1, Ridhima Mehta 2 1 Asst. Prof. & Coordinator, Dept. of Professional Studies, Christ University, Bangalore, India. 2 BCOM (P) Final Year Student, Dept. of Professional Studies, Christ University, Bangalore, ABSTRACT India. This paper examines the relevance and application of fundamental and technical analytical models on listed equity shares. The purpose of this study is to provide insight to investors and traders about the indicators of fluctuations in the prices of such equity and assist in optimum reaction to the same. For the purpose of the study, three well-established companies have been selected; two of which are public companies TCS and Hero MotoCorp. The third entity is a Navratna Public Sector undertaking under the Indian Ministry of Railways. In order to undertake Fundamental Analysis, the financial performance, financial statements as well as background and future management decisions of the company are considered. Technical models used are Relative Strength Index (RSI), Slow Moving Average (SMA), Moving Average Convergence Divergence (MACD) and Bollinger Bands. These indicators and models are used to detect and forecast a trend in the price of the share as well as determine markets as overbought/oversold or bullish/bearish and infer, ultimately, whether to buy or sell. Keywords: Fundamental Analysis, Technical Analysis, Relative Strength Index, Slow Moving Average, Moving Average Convergence Divergence, Bollinger Bands. 1. INTRODUCTION Identifying the factors important in explaining equity price has long been a focus, with research divisible into the two rich but largely distinct and often competing arms of fundamental and technical analysis. According to the fundamental analysis, each security has an intrinsic value and the market forces would ensure that the share price covers up to that value in the long run. The technical approach states that past share prices and volumes tend to follow a pattern, and they can be used to predict future price movements. Forces of demand and supply in general determine the share price. The fundamentalists, however, think that demand and supply are a function of rational factors, while technicians attribute it to psychological factors. The technical approach to investment is essentially a reflection of the idea that prices move in a trend, which is determined by the changing attitudes of the investors towards a variety of the economy, monetary, political and psychological forces. The technical approach is based *Corresponding Author 997

2 on the theory that the price is a reflection of mass psychology ranging from panic, fear and pessimism on one hand; confidence, excessive optimism and greed on the other. But the possible existence of an efficient market poses a major challenge to the ability of technical analysts to select shares, which will outperform the market. To produce excess returns, technical analysts must have identified information not reflected in securities prices, implying the market is not efficient. 2. REVEW OF LITERATURE Venkatesh, K. K. and Madhu Tyagi conducted a survey aimed at determining the attitude of the analysts towards technical analysis and the success they attribute to it.the survey covered institution and individuals who have a long record of trading to the stock market and concluded that technical analysis could generate superior profits and so applied these tools predominantly to the equitysegment of the market. A majority of them use technical analysis along with fundamental analysis. There a greater preference for technical indicators such as:patterns, moving averages, trend line, et cetera for short term decisions. Jenni L. Bettman, Stephen J. Sault, Emma L. Welch tried to value equity integrating both fundamental and technical analysis to test if they are complements or substitutes. They reached to the conclusion that whilst both give apt results when used in seclusion, using them together gives more accurate and detailed results for investments. Mark P. Taylor and Helen Allen reported the results of a questionnaire survey conducted on chief foreign exchange dealers in London on behalf of Bank of England. They concluded that 9% of respondents placed weight technical analysis when discerning view on the market. There is an inclination to use technical analysis at shorter horizons, and fundamental analysis as the duration of the period increases. A large number of sample concluded that technical and fundamental analysis are complementary forms of analysis and a number of them also suggested that technical may be self-reliant. 3. OBJECTIVE OF STUDY Both fundamental and technical analysis literatures invest considerable effort in assessing their respective ability to explain share prices but do so without reference to each other. The objective of this research is to analyze the relevance of fundamental and technical analysis for various types of stock in the Indian stock market by comparing the past data in respect of the investors. It is also aimed at establishing a relationship between both analyses when used together as well as separate with respect to developing an efficient portfolio for an investor or trader. 4. DATA FOR STUDY The data used for this study relates to three companies Tata Consultancy Services (TCS), Hero MotoCorp and Containers Corporation of India (CONCOR). The first two are public listed entities, and the third is a Government owned company. Secondary data pertaining to 1 April, 212 to 3 Sept 215 is used for fundamental analysis. Technical analysis uses data from 13 Nov 214 to 13 Nov 215. Copyright 212 Published by IJMRR. All rights reserved 998

3 5. RESEARCH METHODOLOGIES 1. Fundamental analysis a. Company Analysis b. Ratio Analysis 2. Technical analysis: a. Relative Strength Index (RSI): This is a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula: RSI = RS Average Loss per Day where RS = Average Gain Per Day b. Bollinger Band: It is a band plotted two standard deviations away from a simple moving average, developed by famous technical trader John Bollinger. Standard deviation is a measure of volatility; hence, Bollinger Bands adjust themselves to market conditions. When the markets become more volatile, the bands widen, and during less volatile periods, the bands contract. Technical traders use the tightening of the bands as an early indication that the volatility is about to increase sharply. The closer the prices move to the upper band, the more overbought the market and the closer the prices move to the lower band, the more oversold the market. c. Moving Average Convergence Divergence (MACD): It is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. d. Simple Moving Average (SMA): It is a simple arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in price, while long-term averages are slow to react. 6. ANALYSIS 6.1 Tata Consultancy Services FundamentalAnalysis TCS is the largest firm in the IT sector in India, with the highest market capitalization as well return on Equity and Return on Assets compared to any other firm in the same sector. It has a worldwide base, providing solutions to companies all over the globe in 46 countries. Hence, fluctuations in currency valuations have a direct effect on TCS. In July 214, TCS became the first Indian company to cross Rs. 5, crores mark in market capitalization. TCS also ended Reliance Industries 23-year run as most profitable firm Products and services in Jan, 215. As seen in the graphs below, TCS has consistently grown in revenues over the past 14 quarters. The earning generated per share has also gone up over past 3 financial years. However, as per the ratio analysis the profitability margins are strong but have decreased Copyright 212 Published by IJMRR. All rights reserved 999

4 compared to previous financial year; the short term solvency ratios too reduced, although not too drastically. Therefore, overall the ratios and company analysis indicates that TCS is financially and managerially strong and hence, a worthy investment Fig. 1: Revenues of TCS (in Rs. Crores) Fig. 2: EPS of TCS (in Rs.) March '15 March '14 Operating Gross Profit Net Profit Profit Margin (%) Margin (%) Margin (%) Return On Capital Employed (%) Return On Net Worth (%) Fig. 3: Financial Ratios of TCS Current Ratio Quick Ratio March '13 March '12 Technical Analysis TCS stock has been performing well from the month of June where it declared its dividend of 24% on 5th June, 215. In the month of December 14 it did suffer its 12 months low position at a share price of Rs due to cautious growth announced by the Management as well as cross currency impact. In Nov 215, the stock prices are declining primarily due to US VISA issues as well as terror attacks in Paris. According to Relative Strength Index, TCS is Marginally Weak with an RSI of 3.29 as on 13 Nov, 215. With RSI at 3.29 it indicates that TCS is almost on the over-sold line but is currently neither over-bought nor over-sold. The trend is likely to reverse and move upward. With MACD we can see that the signal line is above the MACD indicating a bearish market. %b is The price is below the lower Bollinger band and can be seen as a sign of over-sold market. This might be a good entry time to partake in possible bigger uptrend. As per the SMA, the 2 day SMA cuts the 5 and 2-day SMA from above and recedes below indicating a sell sign in Nov, 215. Copyright 212 Published by IJMRR. All rights reserved 1

5 Fig. 4: RSI of TCS Fig. 5: MACD of TCS Fig. 6: SMA of TCS Fig. 7: Bollinger Bands of TCS Conclusion: TCS is fundamentally strong and a good stock to add to any portfolio. As per technical analysis too, if the stock is oversold, it implies an opportunity to buy the shares at a lower price and generate returns by both traders and investors. Although, traders are suggested to wait till upward trend is more likely. 6.2 Hero MotoCorp Fundamental Analysis Hero MotoCorp is the second largest two wheeler manufacturer in India, with a market capitalization of Rs. 54,478 crores.it has 4 manufacturing plants in Uttarakhand and Haryana with a total production capacity of 76 lakhs 2-wheelers per annum. As seen in the graphs below, Hero MotoCorp has had a steady growth of revenues over the past financial year, being the highest. The earning per share, however, continues to rise even in the current financial year. According to the ratio analysis the profitability Copyright 212 Published by IJMRR. All rights reserved 11

6 margins are consistent and the return on capital employed has risen considerably. However, the return on equity, which is a very important investor ratio, has been declining. Fundamentally, the company has been performing better than most competitors and is a good investment to be added to any portfolio Fig. 8: Revenues of Hero MotoCorp (in Rs. Crores) Fig. 9: EPS of Hero MotoCorp (in Rs.) Operating Profit Margin (%) Net Profit Margin (%) Return On Capital Employed (%) Return On Equity (%) Current Ratio Acid Test Ratio Fig. 1: Financial Ratios of Hero MotoCorp March '15 March '14 March '13 March '12 Technical Analysis Hero MotoCorp declared its dividend of 15% on 7th May, 215, suffered its 52 week lowest on 8 th May but rose steadily aftertill September. In the month of December 14 it saw its 12 months highest value at Rs As of Nov 215, the stock prices are flourishing mainly owing to the festive month and record-high sales of 1-million units recorded in the same. The Relative Strength Index 54.2 as on 13 Nov, 215, which is marginally strong. It indicates that the stock is neither over-bought nor over-sold and hence, is a buy or a hold sign. With MACD we can see that the signal line is in conjunction with the MACD indicating a possible change in trend.in October, the signal line was below the MACD, indicting a buy sign. The Bollinger bands are quite contracted indicating a less volatile price. The SMA is in middle of the bands with an upward trend, indicating a sign to buy. As per the SMA, the 2 day SMA cuts the 5 and 2-day SMA from below and recedes above indicating a buy sign in Nov, 215. Copyright 212 Published by IJMRR. All rights reserved 12

7 Fig. 11: RSI of Hero MotoCorp Fig. 12: MACD of Hero MotoCorp Fig. 13: SMA of Hero MotoCorp Fig. 14: Bollinger Bands of Hero MotoCorp Copyright 212 Published by IJMRR. All rights reserved 13

8 Conclusion: Tata MotoCorp displays strong fundamental factors and a good stock to buy at this time. As per technical analysis too all indicators show a buy sign and increase returns by both traders and investors. 6.3 Container Corporation of India Fundamental Analysis Container Corporation of India or CONCOR has the second largest market capitalization, in Transport & Logistics Sector, of Rs. 26,533 crores. It is an undisputed market leader having a network of 62 ICDs/CFSs in India. In addition to providing inland transport by rail for containers, it has also expanded to cover management of Ports, air cargo complexes and establishing cold-chain. CONCOR has also developed multimodal logistics support for domestic and international containerization and trade. The graphs below show CONCOR s revenues have been growing every quarter with high expectations from the next 2 quarters of However, the earning per share has reduced over recent quarters due to lower Net profit. According to the ratio analysis Fig. 15: Revenues of CONCOR (in Rs. Crores) Technical Analysis Fig. 16: EPS of CONCOR (in Rs.) The share price of CONCOR has fallen following the announcement to sell off 5% Govt. stake on 1 th November, 215. The RSI of the company is which indicates it is a good investment. MACD analysis; the company is running at and signal line is at -2.28; implying a buy sign. The SMA 3 cuts SMA 5 from above and reclines but not SMA 2 and hence, shows a buy sign. The Bollinger-bands are expanding indicating price volatility but the price is above the SMA 2which is a healthy sign to invest in the stock. Fig. 17: RSI of CONCOR Copyright 212 Published by IJMRR. All rights reserved 14

9 Fig. 18: MACD of CONCOR Fig. 19: SMA of CONCOR Fig. 2: Bollinger Bands of CONCOR Conclusion: Container Corporation is both fundamentally and technically a strong investment. All indicators show a buy sign and increase in returns for both traders and investors. 7. CONCLUSION With increased complexity and intraday price volatility, a narrow technical approach to trading without consideration for the broad economic and fundamental factors, is no longer sufficient. Although there is no definitive answer whether technical analysis can be used as a substitution for fundamental analysis or vice versa, there is a little doubt that combining the strength of both strategies can help investors better understand the markets and gauge the direction in which their investment might beheaded. Technical analysis is important because it is the study of chart pattern and trends. This study plays off of the emotions and is extremely helpful in the short term and earning an income at Copyright 212 Published by IJMRR. All rights reserved 15

10 a fast rate. Fundamental analysis talks about company as a whole. This provides the trader with an idea of what he is actually buying. The fundamentals provide a decent buying pressure when the company is strong and selling pressure when the company is weak. Thus combining both the technical and fundamental analysis together will help the traders and investors to have a better chance of making a profitable trade. REFERENCES [1] Venkatesh KK, Tyagi M. Technical Analysis and Its Usage in Indian Capital Markets: A Survey. Bangladesh Res. Pub. J. 211; 5(4): [2] Bettman JL, Sault SJ, Welch EL. Fundamental and Technical Analysis: Substitutes or Compliments. 26. SSRN: [3] Taylor MP, Allen H. The use of technical analysis in the foreign exchange market. Journal of International Money and Finance 1992; 11(3): [4] [5] [6] [7] [8] [9] [1] [11] [12] [13] [14] [15] [16] [17] *All data pertaining to companies taken from their official sites. Copyright 212 Published by IJMRR. All rights reserved 16