Unit 2: Fundamental and technical analysis
Security Analysis and Portfolio Management notes · PTU syllabus (MCOP402-18)
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Unit summary
Investors pick securities by studying fundamentals or reading charts. This unit covers economic analysis, industry analysis and the industry life cycle, SWOT analysis of industries, company analysis and ratio analysis, and technical analysis — Dow theory, volume, sentiment and confidence indicators, and point-and-figure and bar charts.
After this unit you can
- Explain economic and industry analysis including the life cycle
- Apply SWOT and ratio analysis in company analysis
- Explain Dow theory and technical indicators
- Construct and interpret bar and point-and-figure charts
PTU syllabus topics
- Economic analysis
- industry analysis and life cycle
- SWOT analysis for industries
- company analysis and ratio analysis
- technical analysis techniques — Dow theory
- volume/sentiment/confidence indicators
- point-and-figure and bar charting
- 1Economy analysis
GDP, inflation, interest rates
- 2Industry analysis
Life cycle, competition
- 3Company analysis
Ratios, management, earnings
- 4Intrinsic value
Buy if price < value
Topic 1
Economic and industry analysis
- Economy analysis
GDP, inflation, interest rates, fiscal and monetary policy
- Industry analysis
Life cycle, competition, regulation, demand
- Company analysis
Financials, management, valuation
Economic analysis
- Key variables: GDP growth, inflation, interest rates, fiscal deficit, balance of payments, exchange rate, monsoon (for India), industrial production (IIP), corporate earnings outlook, political stability.
- Leading, coincident and lagging indicators of the business cycle.
Industry analysis
- Industry life cycle: pioneering, expansion (growth), stabilisation (maturity), decline.
- Factors: demand and growth, cost structure, competition (Porter's Five Forces), government policy, technology, labour, raw materials, cyclicality.
- Classification: growth (renewables, EVs), cyclical (auto, metals), defensive (FMCG, pharma), sunset industries.
Topic 2
SWOT analysis for industries
Strengths
Low-cost manufacturing, skilled scientists, large generic portfolio
Weaknesses
Dependence on imported APIs, low R&D spend
Opportunities
Patent expiries, global demand for generics, PLI schemes
Threats
USFDA regulatory actions, price controls, competition from China
Topic 3
Company and ratio analysis
- Qualitative: management quality and governance, competitive advantage (moat), brand, business model, promoter holding and pledging.
- Quantitative: financial statement analysis and ratios.
EPS
Net profit for equity ÷ Number of shares
P/E ratio
Market price ÷ EPS
P/B ratio
Market price ÷ Book value per share
Dividend yield
DPS ÷ Market price × 100
ROE
Net profit ÷ Shareholders' equity × 100
Intrinsic value (DDM)
D1 ÷ (k − g)
Example
EPS ₹25, industry P/E 18 → fair price ≈ ₹450; if the market price is ₹380, the share appears undervalued (buy signal, if fundamentals are sound).
Topic 4
Technical analysis and Dow theory
Technical analysis studies past prices and volumes to forecast future price movements. Assumptions (Dow Theory roots): market action discounts everything; prices move in trends; history repeats.
Dow Theory
Primary, secondary and minor trends
Charts
Line, bar, candlestick, point and figure
Patterns
Head and shoulders, double top/bottom, triangles, flags
Support and resistance
Price floors and ceilings
Indicators
Moving averages (SMA, EMA), RSI, MACD, Bollinger Bands
Market breadth
Advance–decline ratio, volume
- Moving average crossover: short-term MA crossing above long-term MA (golden cross) — buy; below (death cross) — sell.
- RSI: above 70 overbought, below 30 oversold.
- Volume confirms price trends.
Dow theory in detail
- Developed from Charles Dow's editorials (1900s): primary trend (bull or bear, months to years), secondary reactions (weeks to months, retracing one-third to two-thirds), minor movements (days).
- Phases of a bull market: accumulation, public participation (mark-up), distribution; trends confirmed when industrial and transport averages agree; volume confirms the trend.
Topic 5
Volume, sentiment and confidence indicators
Volume indicators
Volume rising with price confirms the trend; on-balance volume
Breadth indicators
Advance–decline ratio, new highs vs new lows
Sentiment indicators
Put–call ratio, short interest, India VIX, FII/DII flows, odd-lot theory (contrarian)
Confidence indicators
Barron's confidence index — yield on high-grade bonds ÷ yield on average bonds
Momentum indicators
RSI, MACD, rate of change
- Contrary opinion theory: when the majority (especially small investors) are extremely bullish, it is time to sell, and vice versa.
Topic 6
Bar charts and point-and-figure charts
- Bar chart: each period shown by a vertical line from low to high with a tick for the close (open on the left); reveals trends, support, resistance and patterns.
- Candlestick chart: body shows open–close range (green/white up, red/black down); patterns — doji, hammer, engulfing.
- Point-and-figure chart: plots only significant price changes — X for rises and O for falls in columns; ignores time and small moves; a column changes after a reversal of a set number of boxes (three-box reversal common); used to identify breakouts and price targets.
Time axis
Yes
No
Shows
Every period's high, low, close
Only significant price changes
Volume
Often plotted below
Not shown
Use
Trends and patterns
Breakouts and price targets
Key terms
- Industry life cycle
- Stages of pioneering, expansion, stabilisation and decline
- Dow theory
- Theory of primary, secondary and minor market trends
- Breadth of market
- Proportion of stocks advancing vs declining
- Confidence index
- Ratio of high-grade to average bond yields
- Point-and-figure chart
- Chart of X's and O's showing significant price changes
Quick revision
- EIC analysis; industry life cycle; SWOT for industries.
- Company analysis: qualitative factors, ratios, intrinsic value.
- Dow theory: primary, secondary, minor trends; bull phases.
- Indicators: volume, breadth, sentiment (PCR, VIX), confidence index.
- Charts: bar, candlestick, point-and-figure.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is industry analysis?
- Q2.State the stages of the industry life cycle.
- Q3.What is Dow theory?
- Q4.What is the advance–decline ratio?
- Q5.What is Barron's confidence index?
- Q6.Distinguish bar and point-and-figure charts.
Long-answer questions
- Q1.Explain economic and industry analysis in fundamental analysis.
- Q2.Explain company analysis using ratios.
- Q3.Explain Dow theory and technical indicators.
- Q4.Explain charting techniques used in technical analysis.
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