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A Note on Stock Market Indicators and Stock Prices

Published online by Cambridge University Press:  19 October 2009

Benton E. Gup
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Extract

Do changes in stock market indicators, such as the short interest ratio, signal changes in stock prices? Popular stock market lore and numerous books and articles support the worth of “technical” analysis. On the other hand, to the extent that stock prices follow a random walk, technical indicators would seem to be of no value. The two positions can be reconciled to a degree by realizing that a variable can follow a random walk with respect to its own sequence and still be successfully predicated by some other variable(s). Furthermore, successful predications of stock prices can be made on the basis of available information, if that information is used in some unique manner that has not been fully developed by other market participants.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 4 , September 1973 , pp. 673 - 682
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

1 Most texts on the stockmarket and investments include descriptions of various technical indicators. For example, see Cohen, Jerome B. and Zinbarg, Edward D., Investment Analysis and Portfolio Management (Homewood, Ill.: Richard D. Irwin, Inc., 1967)Google Scholar, chapter 14. See also Latane, Henry A. and Tuttle, Donald, Security Analysis and Portfolio Management (New York: The Ronald Press Company, 1970)Google Scholar, chapter 14. In addition, the financial press and brokerage house news-letters keep the investing public abreast of “technical” developments.

2 For a comprehensive discussion of the random walk hypothesis, see Cootner, Paul H., ed., The Random Character of Stock Market Prices (Cambridge, Mass.: MIT Press, 1964)Google Scholar, and Pinces, George E., “The Random Walk Hypothesis and Technical Analysis,” Financial Analysts Journal, vol. 26 (March–April 1970), pp. 104–110.CrossRefGoogle Scholar

3 This point is discussed in some detail by: Roll, Richard, The Behavior of Interest Rates (New York: Basic Books Inc., 1970), pp. 8–9.Google Scholar

4 Biggs, Barton M., “The Short Interest - A False Proverb,” Financial Analysts Journal, vol. 22 (July–August 1966), pp. 111–116CrossRefGoogle Scholar.

5 Mayor, Thomas H., “Short Trading Activities and the Price of Equities: Some Simulation and Regression Results,” Journal of Financial and Quantitative Analysis, vol. 3 (September 1968), pp. 283–298.CrossRefGoogle Scholar

6 Smith, Randall D., “Short Interest and Stock Market Prices,” Financial Analysts Journal, vol. 24 (November–December 1968), pp. 151–154.CrossRefGoogle Scholar

7 Kaish, Stanley, “Odd Lotter Trading of High and Low Quality Stocks,” Financial Analysts Journal, vol. 25 (March–April 1969), pp. 88–91CrossRefGoogle Scholar.

8 Kewley, Thomas J. and Stevenson, Richard A., “The Odd-Lot Theory as Revealed by Purchase and Sales Statistics for Individual Stocks,” Financial Analysts Journal, vol. 23 (September–October 1967), pp. 103–106CrossRefGoogle Scholar.

9 For another discussion of this ratio, see Statter, John, “New Market Guide?” Barron's (February 6, 1967), p. 5.Google Scholar The mutual funds cash position consists of cash and deposit, receivables, all U. S. Government securities, and other short-term debt securities, less current liabilities. The ratio is calculated by dividing the cash position by total assets.

10 The common stock activity rate is defined as the average of purchases and sales divided by the average market value of stockholdings. The data are reported by the Securities and Exchange Commission.

11 For information on the use of dummy variables, see Johnston, J., Econometric Methods (New York: McGraw-Hill Book Co. Inc., 1963).Google Scholar