Methodology -
drivers of economy
Economic Juggernaut

Economics is the study of how people make choices under conditions of scarcity and the impact of those choices for people at an individual level and society at macro level. Economic analysis of human behavior begins with the assumption that people are rational – they have well-defined goals and try to achieve them as best they can. In trying to achieve their goals, people normally face trade-offs: resources both material and human are limited and making one choice would generally mean letting go of something else. It requires prioritization of needs and wants and allocation of limited resources to the desired goals. 

As discussed earlier, there are 2 major schools of thoughts in market analytics

a. Fundamental Analysis – This type of analysis can also be viewed as Driver Analysis based on the assumption that market may mis-price securities in the short run but in the long run, prices would merge with the securities’ fair value or intrinsic value. Therefore, profits in investments come from not only identifying a good investment option but also making the investment at the right price. This thought process is in contradiction of Efficient Market Hypothesis (EMH), which propagates that share prices incorporate and reflect all relevant information.

b. Technical Analysis – This type of analysis can also be viewed as Time Series analysis based on the assumption that all information that can affect the performance of a stock, company fundamentals, economic factors and market sentiments, is reflected already in its stock prices. Accordingly, technical analysts do not care to analyze the fundamentals of the business. Instead, the approach is to forecast the direction of prices. 


I. Fundamental Analysis considers both qualitative and quantitative dimensions of a business. While financials will reveal history of the business and the financial readiness to grow in the future, evaluating factors such as the economic conditions favourable to the business, the ability of the management to identify and exploit opportunities, the operating efficiencies that the business possesses and the risks that may affect the plans and its ability to meet these contingencies, will define the attractiveness of the business as an investment proposition.

Accordingly, fundamental analysis includes following:

  1. Economic analysis
  2. Industry analysis
  3. Company analysis

Fundamental analysis may be triggered by changing macro-economic factors, both international and national, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, prices of commodities, regulatory aspects and others. This can lead to an analysis of their impact on different industries and then to search to the best businesses in the industry. This is called top-down approach to fundamental research. For example, the regulatory uncertainty regarding spectrum auction in the telecom sector in India would trigger a re-look at the industry’s prospects and its impact on the different companies in the sector. However, sometimes analysis is triggered by some news or piece of information on some company, which may move to industry analysis and then economic analysis to see whether broad industry and economic parameters favor the company. This is called bottom-up approach to fundamental research. Indeed, sometimes, bottom-up analysts focus purely on dynamics of business and industry with little or no attention to the Economic factors as their focus remains on buying and holding fundamentally strong businesses which would probably do well across the economic cycles, such as pharmaceuticals, consumer goods and other such businesses. 

II.  Technical Analysis through the study of patterns in historical market data – price and volume believe that market tends to repeat itself, and hence, market activity will generate indicators in price trends that can be used to forecast the direction and magnitude of stock price movements in future. There are three essential elements in understanding price behavior:

  1. The history of past prices provides indications of the underlying trend and its direction.
  2. The volume of trading that accompanies price movements provides important inputs on the underlying strength of the trend.
  3. The time span over which price and volume are observed factors in the impact of long term factors that influence prices over a period of time.

Technical analysis integrates these three elements into price charts, points of support and resistance in charts and price trends. By observing price and volume patterns, technical analysts try to understand if there is adequate buying interest that may take prices up, or vice versa. Technical Analysis is a specialized stream in itself and involves study of various trends- upwards, downwards or sideways, so that traders can benefit by trading in line with the trend. Identifying support and resistance levels, which represent points at which there is a lot of buying and selling interest respectively, and the implications on the price if a support and resistance level is broken, are important conclusions that are drawn from past price movements. For example, if a stock price is moving closer to an established resistance level, a holder of the stock can benefit by booking profits at this stage since the prices are likely to retract once it is close to the resistance level. If a support or resistance is broken, accompanies by strong volumes, it may indicate that the trend has accelerated and supply and demand situation has changed.  Trading volumes are important parameters to confirm a trend. An upward or downward trend should be accompanied by strong volumes. If a trend is not supported by volumes or the volumes decrease, it may indicate a weakness in the trend. 


Particular Fundamental Analysis Technical Analysis
Modeling Technique
Regression Analysis to understand weightage of Individual Drivers
Time Series Analysis of Price Action and Identification of Inflection Points
Drivers of Relationships
Political, Economic, Socio-Cultural, Technological & Environmental
Price, Volume, Open Interest, Momentum, Force and Oscillation
Notion of Risk-Reward
Profitability Ratios, Leverage Ratios, Return Ratios, Liquidity Ratio, Price to Earning, Price to Earnings Growth
Moving Averages, Bull/Bear Power, Oscillators, Relative Strength Index, Bands, Distance from the inflection points like 20, 50, 100 periods
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