Fundamental and Technical Analysis

The whole unit on one sheet: how to read the statements, run the ratios, respect the insider rules, and interpret the charts and sentiment the exam loves.

Fundamental Analysis: The Statements

• Fundamental analysis measures intrinsic value: intrinsic value above market price means undervalued (a buy); below means overvalued (a sell). Uses both quantitative and qualitative data.
• Top-down goes economy to industry to company; bottom-up goes company to industry to economy.
• Balance sheet = snapshot at a point in time: Assets = Liabilities + Shareholders' Equity. Income statement and cash flow statement cover a period of time.
• Total capitalization = long-term debt + preferred stock + common equity.
• Depreciation and depletion are non-cash charges; land is never depreciated.
• Rising prices: FIFO (First In, First Out) gives higher earnings and higher inventory value; LIFO (Last In, First Out) gives lower earnings but lower taxes. LIFO is barred under International Financial Reporting Standards (IFRS).
• Unqualified (clean) auditor opinion is the best outcome.

The One-Liners That Win Points

• Undervalued = buy; overvalued = sell. Intrinsic value above price is the attractive candidate.
• Balance sheet is a photograph; the income statement is a movie.
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) adds back non-cash charges but is not actual cash flow.
• Fully diluted EPS (earnings per share) is the most conservative figure: always equal to or lower than basic EPS. Dilutive securities are convertible bonds, convertible preferred, options, and warrants.
• Current ratio includes all current assets; quick ratio (acid test) excludes inventory (the least liquid current asset).
• Book value per share excludes intangibles and preferred stock; bond interest coverage uses EBIT, not net income.
• P/E (price-to-earnings) uses market price, not book value; dividend payout ratio + retention ratio = 100%.
• Bidder in a tender offer CAN buy the target's shares; everyone else holding the material nonpublic information cannot trade.
• Technical analysis ignores financial statements: it studies price and volume only.

Numbers to Lock In

Sentiment, Indexes, and the Charts

• Contrarian indicators: put/call ratio, short interest, VIX, mutual fund cash. High put/call (or high VIX) means extreme fear, read as bullish; low VIX means complacency, read as bearish.
• Confirming indicators: trading volume and market breadth (advance/decline) validate the current trend.
• DJIA (Dow Jones) is price-weighted; the S&P 500, Nasdaq Composite, and Russell 2000 are market-cap-weighted (Russell 2000 = small-cap benchmark).
• Bond Buyer indexes: 11 GO and 20 GO track general obligation bonds; the 40 Bond Index (Municipal Bond Index) holds both GO and revenue bonds and standardizes to a 6% coupon; the Revdex-25 tracks revenue bonds only. Rising index yields mean falling prices.
• Support = floor; resistance = ceiling. When support breaks it flips to resistance (role reversal). Uptrend line drawn along the lows; downtrend line along the highs.
• Head and shoulders at a top = bearish; inverted head and shoulders at a bottom = bullish. Neither is confirmed until price breaks the neckline on increased volume. Consolidation, flags, and pennants signal the trend continues.
• Golden cross (short-term moving average crosses above long-term) = bullish; death cross (below) = bearish. Typically the 50-day and 200-day moving averages.

Memory Aid: Bond Buyer Indexes

• 11 and 20 = General Obligation only
• 40 = GO + Revenue
• Revdex = Revenue only

Top Gotchas

• An unqualified opinion is the best outcome: it sounds negative but means "no qualifications needed."
• Total capitalization includes preferred stock; forgetting it is the classic mistake.
• A rising debt-to-equity ratio warns bondholders, not just equity holders (higher bankruptcy risk).
• High put/call ratio is bullish, not bearish; the crowd is usually wrong at extremes, and low VIX is complacency, not safety.
• DJIA is price-weighted: a higher-priced stock has more influence regardless of company size.
• Short tendering is prohibited: you may tender only shares you have a net long position in.
• Overbought does not mean sell immediately; prices can stay overbought for a long time, and a breakout without volume is suspect.
• Stabilization by the managing underwriter is legal during distribution, but the stabilizing bid must be at or below the public offering price.

One-Breath Recap

Fundamental analysis reads the statements and ratios to judge intrinsic value, so undervalued is a buy and overvalued is a sell, while technical analysis reads price and volume through trendlines, support and resistance, patterns, and moving averages. Lock in the ratio formulas, remember the contrarian sentiment indicators and the Bond Buyer indexes, and respect the tender-offer insider rules. Nail those and this unit answers itself.

Need more than the recap? This is a condensed summary. If it is not enough, read the full Fundamental and Technical Analysis unit for the complete lesson.