Page 195 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes 5. Market Breadth Index: The market breadth index is a variant of the advance decline ratio.
To compute it, we take the net difference between the number of stocks rising and the
number of stocks falling, added (or subtracted) to the previous.

Example: If in a given week 600 shares advanced, 200 shares declined, and 200 were
unchanged, the breadth would be 2[9600-200)/200]. The figure of each week is added to previous
week's figure. These data are then plotted to establish the pattern of movement of advance and
declines.
The purpose of the market breadth index is to indicate whether a confirmation of some
index has occurred. If both the stock index and the market breadth index increase, the
market is bullish; when the stock index increase but the breadth index does not, the
market is bearish.

6. The Odd-Lot Ratio: Odd-lot transactions are measured by odd-lot changes in index. Odd-
lots are stock transactions of less than, say, 100 shares. The odd-lot ratio is sometimes
referred to as a yardstick of uniformed sentiment or an index of contrary opinion because
the odd-lot theory assumes that small buyers or sellers are not very bright especially at
tops and bottoms when they need to be the brightest. The odd-lot short ratio theory
assumes that the odd-lot short sellers are even more likely to be wrong than odd-lotters in
general. This indicator relates odd-lot sales to purchases.
7. Insider Transactions: The hypothesis that insider activity may be indicative of future
stock prices has received some support in academic literature. Since insiders may have the
best picture of how the firm is faring, some believers of technical analysis feel that these
inside transactions offer a clue, to future earnings, dividend and stock price performance.
If the insiders are selling heavily, it is considered a bearish indicator and vice versa.
Stockholders do not like to hear that the president of a company is selling large blocks of
stock of the company. Although the president's reason for selling the stock may not be
related to the future growth of the company, it is still considered bearish as investors
figure the president, as an insider, must know something bad about the company that
they, as outsiders, do not know.

Case Study ALERT - Citigroup Silently Moving Up behind
the Headlines

tocks of Citigroup (C) have been moving up silently behind the headlines for much
of August, amidst news of how more and more banks are being shut across the
Snation. The number of bank failures this year now stands at 84 amid the poor
economy and rising loan defaults.
So how safe, really, is Citigroup?
From a fundamentals perspective, it is interesting to note that Citigroup has been listed
on the S&P 4 STAR Portfolio. In a report dated Aug 22, 2009, the analyst from S&P noted
that:
"City has restructured its business into Citicorp and Citi Holdings, with Citi Holdings
carrying mostly non-core and distressed assets. The plan is ultimately to unwind Citi
Holdings, which should lead to a more stable revenue stream. With the government and
public and private investors converting some of their preferred shares into common
equity, tangible capital levels now seem adequate. Credit losses on loans held will likely
Contd...

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