Accep tability of the trend forecasting model using the time series analysis of stock indices

ACCEPTABILITY OF THE TREND FORECASTING MODEL USING
THE TIME SERIES ANALYSIS OF STOCK INDICES

___________________________

A DISSERTATION
Presented to the Faculty of the Graduate School
Southern Luzon State University, Lucban, Quezon, Philippines
in Collaboration with
Thai Nguyen University, Socialist Republic of Vietnam

___________________________

In Partial Fulfillment
of the Requirements for the Degree
Doctor of Business Administration

___________________________

By
DAO THE HUY (IT)
December 2013
i


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Chapter 1
INTRODUCTION
To industrialize and modernize the country requires an effort to
maintain stable economic growth and restructure the economy to enhance its

efficiency and competitiveness, Vietnam needs huge capital investment.
Therefore, building the securities market in Vietnam has become an urgent
need to mobilize mid-term and long-term capital within, as well as outside the
country into economic investment through debt and capital securities. In
addition, equitization of state-owned enterprises along with the establishment
and development of the securities market has created a more open and
healthy business environment.
On July 10, 1998, the Prime Minister signed Decree No. 48/1998/NDCP on the stock and securities market and a decision to set up two securities
trading centers in Hanoi and Ho Chi Minh City. (The Vietnam STATE
SECURITIES COMMISSION (SSC), 2012). On July 20th 2000, the Ho Chi
Minh City Securities Trading Center officially commenced operation and
executed the first trading session on July 28, 2000 with two types of listing
stocks.
After seven years of growth and integration into the global securities
market, the government signed Decision No. 599/QD-TTg on May 11, 2007 to
transfer the Ho Chi Minh City Securities Trading Center to Hochiminh Stock
Exchange (HOSE). On August 8, 2007, Hochiminh Stock Exchange was
officially opened.


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Hanoi Stock Exchange (HNX) was established by Decision no.
01/2009/QĐ-Ttg dated January 02, 2009 by the Prime Minister of Vietnam on
the grounds of transforming and restructuring Hanoi Securities Trading
Centre. Hanoi Securities Trading Centre (HASTC), which was founded in
compliance with Decision No.127/1998/QĐ-TTg dated July 11, 1998, has
gone live since 2005 organizing share auctions and bond biddings. It also
provides a secondary market for both stocks and bonds as its major activities.
Hochiminh Stock Exchange has experienced encouraging growth. On

August 31, 2012, it has listed 303 stocks with a total capitalization value of
VND 154,137,023.19 billion and Hanoi Stock Exchange (HNX) has listed 397
stocks with a total listed value of VND 84,511,094.02 billion (The Vietnam
STATE SECURITIES COMMISSION (SSC), 2012 ) . In the near future, the
number of listed stocks on HOSE and HNX will increase quickly because the
government has a policy to equitize a number of large companies and stateowned commercial banks which will be listed in the market.
The primary purpose of this research was to assess the Time Series
Analysis Model which the researcher has developed to help investors know
how to recognize the trend of the market and to provide objectiveness in the
decision-making process. There are more than 700 stocks (State Securities
Commission of Vietnam, 2012) for investors to choose from and this research
will help investors to make an informed decision when they take actions to
buy or sell stocks. In Vietnam, the traders mostly buy or sell by emotion or
rumors especially individual investors, therefore they almost always make a
low profit or a loss.


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There are many technical indicators to support investor decision but
these six indicators that the author used to build the Time Series Analysis
Model have not been combined in any model before, and so their usefulness
as a combined set of indicators has not yet been identified.
The researcher has more than five years of experience in stock trading
in the Vietnam market and realizes the efficiency of technical analysis, which
uses a number of core calculations based on statistical functions such as
Simple Moving Average, Exponential Moving Average (EMA), simple moving
average plus 2 standard deviations, and simple moving average minus 2
standard deviations. This research will apply statistical functions to find the
trend of Hose and Hnx and to support trading decisions.

Background of the Study
Normally, the respondents would need to consider the following
questions, so that they can not only make trading decisions, but also assess
any trend prediction model that they use:
1. What is the current trend of the Vietnam stock index?
1.1. Uptrend
1.2. Downtrend
1.3. Sideways trend
2. What are the key variables that influence the technical analysis of the
stock price?
2.1. Open price
2.2. High price


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2.3. Low price
2.4. Closed price
2.5. Volume
2.6. Date
3. What action should the investor take with each specific stock in each
period?
3.1 Buy
3.2 Sell
3.3 Wait and hold the money.
The TSA Model is designed to assist the investor to answer these
questions.
Currently some investors do not use any model, and of those that do
use a model, the indicators are often used separately and sometimes these

indicators are used incorrectly. There are about 2000 technical indicators and
most investors usually do not know what the indicator means, how to use the
indicator exactly, or how to combine the technical indicator in trading stock.
For stockbrokers, they use a variety of indicators, but they do not have a
comprehensive model that uses such a broad range of indicators together. It
is expected that the TSA Model will improve this situation for both investors
and stockbrokers.
The 2005-2009 period is considered as an acceleration phase of the
Vietnam

stock

market

with

breakthrough

growth.

The

rate

of

capitalization/GDP far exceeded the development strategy of the market by


5

2010 (at 10-15% of GDP). (Source: Vietnam State Securities Committee,
2012)
With the market size in this period the number of securities companies
and investors also grew strongly. In 2000, there six were only s securities
companies with capital stock average no more than VND 50 billion and by the
end of 2009 there were 105 securities companies with average capital of VND
175 billion, of which some of the larger companies were JSC Saigon
Securities (SSI) with VND 1,000 billion and ACB Securities (ACBS) with VND
1,500 billion.
During this period, in addition to growth, the stock market also
experienced a strong change in management when the Securities Law took
effect in January 2007. In 2007, HCM City Securities Trading Center was
transformed into Ho Chi Minh City Stock Exchange (HOSE) to make it more
active in management, contributing to market development. In 2008, although
Vietnam's stock market was heavily influenced by the global economic
downturn, the average transaction volume in HOSE remained at 13 million
units/session,

deploying

online

transactions,

joint continuous

orders

contributing to the operation of market transactions. In 2009, the policies of

government stimulus and signs of economic recovery helped the market to
flourish again. By the end of 2009, the total market capitalization was 620
trillion, equivalent to 38% of GDP (State securities commission of Vietnam,
2012)
In the last three years, the boom is Vietnam's stock market has fed a
storm of forecasts about market trends, stock prices and recommendations to


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buy, sell or hold specific stocks. So much information has become "disturbing"
to investors, resulting to investors not knowing what they should do. If they
make decisions following this plethora of advice, they will always lose. So how
can investor build an appropriate strategy, and make the correct trading
decisions?
Particularly dangerous are forecasts made by word of mouth, via email, telephone, message broker, analyst, consultant companies and
securities investment companies, because this wave spreads information as
fast as "oil slick". Currently, there are many ways to analyze and forecast
rumored style, jamming, and even forecast nature impose for on investor
psychology, leading investors grab market share or attempt situations that
create misunderstandings and major; distortions of the stock market in order
to profit.
The Vietnam stock market has flourished both in number of listed
stocks and the quality of shares listed over time. This is good opportunity for
stock investors, but it is also quite risky if investors are not equipped with the
right knowledge and proper investment strategy. Having all these premises in
mind, the researcher attempted to apply his knowledge of probability statistics
into technical analysis to help investors identify the trend of the Vietnam stock
market index and to support their trading decisions.

Objectives of the Study
The main purpose of this research was to assess the acceptability of
the Time Series Analysis Model using six statistical indicators of the trend of


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the Vietnam stock index trend and apply these indicators to each separate
stock to help investors make trading decisions (buy/sell/hold).
To assess the usefulness of the TSA Model in terms of:
1. Profile of the respondents
2. Reliability
3. Efficiency
4. Availability of required software and input data?
5. Level of acceptability do you experience when you use the TSA
model in assisting you to make investment decisions?

Hypothesis of the Study
1. The hypothesis itself is a null hypothesis, ―There is no significant
difference in the level of perceptions among the groups of
respondents‖. The model uses six nominated indicators to predict price
rises and price falls on the Hose and HNX stock exchanges of
Vietnam. The respondents are assessing the reliability and usefulness
of the Time Series Analysis Model for decision making for trading
actions (buy/sell/hold).
2. The level of acceptability of the trend forecasting model using the Time
Series Analysis of stock indices is dependent and affected by the
reliability, efficiency and availability variables
Significance of the Study
This study which aimed to assess the perceptions of users of the TSA

Model, used the model to discover the trends of the Vietnam stock index by


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using time series analysis in technical analysis and in supporting trading
decisions. This study would be beneficial to the following:
Stock investors. It is hoped that the study may contribute to more
informed decisions for traders. In stock investment, the action to buy, sell or
wait is a vital decision but the challenge for the investor is to find the proper
point for trading. This research will give the trader a tool or an analysis
method to find the trading point for stocks in the Vietnam stock market.
Stock Analysis Teachers. The outcome of the study may be of great
help to teachers of stock analysis as they will gain more understanding in the
use of technical analysis using time series analysis for stock trading. The
researcher may contribute to a new avenue in his search for better ways to
improve oneself and the work environment. In this way, it would ultimately
lead to a more efficient trading in the teaching of stock analysis.
Finance Students. They will benefit from this study since their main
concerns in technical analysis are what they can apply in stock investment or
commodities trading by analyzing historical data. The researcher hopes that
the results and findings of the study will bring understanding and inspiration to
students to further study this field.
Future Researchers. This study could provide a reference for future
proponents who wish to venture into a study related to this ongoing research.
Thus, using time series in technical analysis of stock trading could serve as a
valuable resource for future studies.


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Scope and Limitation of the Study
The primary aim of this study was to assess the reliability and
usefulness of the TSA Model, which applies time series analysis in technical
analysis to identify the trend of the Vietnam stock index and support trading
decisions.
This

research

surveyed

a

limited

number

of

investors

and

stockbrokers, and thus it gave the perceptions of a sample of the investment
trading community, it did not give the broad perceptions of the whole
investment trading industry.
The model uses the historic data of the Vietnam stock index including:
Vnindex for Hose and Hnindex for HNX from the years 2007 to 2013. About
seven hundred (700) stocks were used as respondents in this study.

The use of time series analysis for technical analysis in this research
included the following instructional variables: open price, high price, low price,
close price, volume and date of trading.
The limitation of using time series analysis for forecasting the trend of
stock market and for supporting trading decisions is that it can be dangerous
to depend totally on the assumption that today's prices can predict future
prices. They often do, but not necessarily.
The time frame of this study covered from March 2011 to March 2013.


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Definition of Terms
For clarity and better understanding of this study, the following terms
were hereby defined conceptually and operationally:
Acceptability. the level of acceptance of the TSA Model by investors.
Back testing. the process of testing a trading strategy on prior time
periods. Instead of applying a strategy for the time period forward, which
could take years, a trader can do a simulation of his or her trading strategy on
relevant past data in order to gauge its effectiveness.
Bear Market. a market condition in which the prices of securities are
falling, and widespread pessimism causes the negative sentiment to be selfsustaining. As investors anticipate losses in a bear market and selling
continues, pessimism only grows. Although figures can vary, for many, a
downturn of 20% or more in multiple broad market indices such as the Dow
Jones Industrial Average (DJIA) or Standard & Poor's 500 Index (S&P 500)
over at least a two-month period is considered an entry into a bear market.
Bull Market. a financial market of a group of securities in which prices
are rising or are expected to rise. The term "bull market" is most often used to
refer to the stock market, but can be applied to anything that is traded, such
as bonds, currencies and commodities.

Close price. is the last price that the security traded for the day. Due to
its availability, the Close is the most often used price for analysis. The
relationship between the Open (the first price) and the Close (the last price)


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are considered significant by most technicians. This relationship is
emphasized in candlestick charts.
Correction. a reverse movement, usually negative, of at least 10% in a
stock, bond, commodity or index. Corrections are generally temporary price
declines, interrupting an uptrend in the market or asset
Date. the day that has the data on the stock price open, high price, low
price and closed price.
Downtrend. is the price movement of a financial asset when the
overall direction is downward. A formal downtrend occurs when each
successive peak and trough is lower than the ones found earlier in the trend.

Figure 1. Downtrend Price Movement

Source:

High price. is the highest price that the security traded on the day. It is
the point at which there were more sellers than buyers (i.e., there are always
sellers willing to sell at higher prices, but the High represents the highest price
buyers were willing to pay).


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Low price. is the lowest price that the security traded on the day. It is
the point at which there were more buyers than sellers (i.e., there are always
buyers willing to buy at lower prices, but the Low represents the lowest price
sellers were willing to accept).
Overbought
1. A situation in which the demand for a certain asset unjustifiably
pushes the price of an underlying asset to levels that do not support the
fundamentals.
2. In technical analysis, this term describes a situation in which the
price of a security has risen to such a degree - usually on high volume - that
an oscillator has reached its upper bound. This is generally interpreted as a
sign that the price of the asset is becoming overvalued and may experience a
pullback.
Open price. is the price of the first trade of the day. When analyzing
daily data, the Open is especially important, as it is the consensus price after
all interested parties were able to "sleep on it."
Oversold
1. A condition in which the price of an underlying asset has fallen
sharply, and to a level below which its true value resides. This condition is
usually a result of market overreaction or panic selling.
2. A situation in technical analysis where the price of an asset has
fallen to such a degree, usually on high volume, that an oscillator has reached
a lower bound. This is generally interpreted as a sign that the price of the


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asset is becoming undervalued and may represent a buying opportunity for
investors.
Resistance (Resistance Level). the price at which a stock or market

can trade, but not exceed, for a certain duration.

Figure 2. Resistance Level

Source:

Retracement. a temporary reversal in the direction of a stock's price
that goes against the prevailing trend. A retracement does not signify a
change in the larger trend. On a chart where a stock's price is generally
headed upward, retracements are the small dips in price that the stock
experiences during its overall upward trend. Whether an investor identifies a
change in a stock's direction as a retracement or a reversal will impact how he
responds to it.


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Figure 3. Retracement

Source:

Sideways Trend. is the horizontal price movement that occurs when
the forces of supply and demand are nearly equal. A sideways trend is often
regarded as a period of consolidation before the price continues in the
direction of the previous move. A sideways price trend is also commonly
known as a "horizontal trend".
Support Level. the price level, which, historically, a stock has had
difficulty falling below. It is thought of as the level at which a lot of buyers tend
to enter the stock. It often referred to as the "support level".
Technical analysis.

a method of evaluating securities by analyzing

statistics generated by market activity, such as past prices and volume.
Technical analysts do not attempt to measure a security's intrinsic value, but
instead use charts and other tools to identify patterns that can suggest future
activity.


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Figure 4. Support Level

Source:

Time Series Analysis.

is the analysis that uses the efficiency of

technical analysis, which uses a number of core calculations based on
statistical functions for the past trading data of stock price and volume such as
Simple moving average, Exponential moving average (EMA), simple moving
average plus two standard deviations, and simple moving average minus two
standard deviations. And how to apply the statistical functions to find the trend
of stock indices and to support trading decisions.
Stock indices. In Vietnam, there are two stock indices: Vn index and
Hnx index. A stock index or stock market index is a method of measuring the
value of a section of the stock market. It is computed from the prices of
selected stocks (sometimes a weighted average).

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Trend. the general direction of a market or of the price of a stock.
Trends can vary in length from short, to intermediate, to long term. If you can
identify a trend, it can be highly profitable, because you will be able to trade
with the trend.
Uptrend. is the price movement of a financial asset when the overall
direction is upward. A formal uptrend is when each successive peak and
trough is higher than the ones found earlier in the trend.

Figure 5. Uptrend

Source:

Volume. is the number of shares that were traded on the day. The
relationship between prices and volume (e.g., increasing prices accompanied
with increasing volume) is important.


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Chapter II
REVIEW OF LITERATURE

This chapter includes several publications related to the technical
analysis of stocks and the use of technical indicators to support stocks
trading. Technical analysis is a discipline for analyzing and forecasting the
direction of the prices of securities through the study of previous market data,
primarily price and volume. A fundamental principle of technical analysis is

that a market's price reflects all relevant information, so the analysis looks at
the history of a security's trading pattern rather than external drivers such as
economics, fundamentals and news events. Price action also tends to repeat
itself because investors collectively tend toward patterned behavior, hence,
technicians' focus on identifiable trends and conditions.
The Dow Theory is the grandfather of all technical market studies. The
Dow Theory on stock price movement is a form of technical analysis that
includes some aspects of sector rotation. The theory was derived from 255
Wall Street Journal editorials written by Charles H. Dow (1851–1902),
journalist, founder and first editor of the Wall Street Journal and co-founder of
Dow Jones and Company. Following Dow's death, William Peter Hamilton,
Robert Rhea and E. George Schaefer organized and collectively represented
Dow Theory, based on Dow's editorials. The six basic tenets of Dow Theory
as summarized by Hamilton, Rhea, and Schaefer are described below.


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Six basic tenets of Dow Theory


The market has three movements
(1) The "main movement", primary movement or major trend may last

from less than a year to several years. It can be bullish or bearish. (2) The
"medium swing", secondary reaction or intermediate reaction may last from
ten days to three months and generally retraces from 33% to 66% of the
primary price change since the previous medium swing or start of the main
movement. (3) The "short swing" or minor movement varies with opinion from
hours to a month or more. The three movements may be simultaneous, for

instance, a daily minor movement in a bearish secondary reaction within a
bullish primary movement.


Market trends have three phases
Dow Theory asserts that major market trends are composed of three

phases: an accumulation phase, a public participation phase, and a
distribution phase. The accumulation phase (phase 1) is a period when
investors "in the know" are actively buying (selling) stock against the general
opinion of the market. During this phase, the stock price does not change
much because these investors are in the minority demanding (absorbing)
stocks that the market at large is supplying (releasing). Eventually, the market
catches on to these astute investors and a rapid price change occurs (phase
2). This occurs when trend followers and other technically oriented investors
participate. This phase continues until rampant speculation occurs. At this


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point, the astute investors begin to distribute their holdings to the market
(phase 3).


The stock market discounts all news
Stock prices quickly incorporate new information as soon as it

becomes available. Once news is released, stock prices will change to reflect
this new information. On this point, Dow Theory agrees with one of the
premises of the efficient market hypothesis.

 Stock market averages must confirm each other
In Dow's time, the US was a growing industrial power. The US had
population centers but factories were scattered throughout the country.
Factories had to ship their goods to market, usually by rail. Dow's first stock
averages were an index of industrial (manufacturing) companies and rail
companies. To Dow, a bull market in industrials could not occur unless the
railway average rallied as well, usually first. According to this logic, if
manufacturers' profits are rising, it follows that they are producing more. If
they produce more, then they have to ship more goods to consumers. Hence,
if an investor is looking for signs of health in manufacturers, he or she should
look at the performance of the companies that ship the output of them to
market, the railroads. The two averages should be moving in the same
direction. When the performance of the averages diverges, it is a warning that
change is in the air.
Both Barron's Magazine and the Wall Street Journal still publish the
daily performance of the Dow Jones Transportation Index in chart form. The


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index contains major railroads, shipping companies, and air freight carriers in
the US.


Trends are confirmed by volume
Dow believed that volume confirmed price trends. When prices move

on low volume, there could be many different explanations. An overly
aggressive seller could be present for example. But when price movements
are accompanied by high volume, Dow believed this represented the "true"

market view. If many participants are active in a particular security, and the
price moves significantly in one direction, Dow maintained that this would be
the direction in which the market anticipated continued movement. To him, it
was a signal that a trend is developing.


Trends exist until definitive signals prove that they have ended
Dow believed that trends existed despite "market noise". Markets might

temporarily move in the direction opposite to the trend, but they will soon
resume the prior move. The trend should be given the benefit of the doubt
during these reversals. Determining whether a reversal is the start of a new
trend or a temporary movement in the current trend is not easy. Dow
Theorists often disagree in this determination. Technical analysis tools
attempt to clarify this but they can be interpreted differently by different
investors.
Nowadays, the Dow Theory remains the fundamental basic framework
for technical analysis and technical indicators. A market trend is a putative
tendency of a financial market to move in a particular direction over time. The


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―Use of Trend‖, written by Cory Janssen, Chad Langager and Casey Murphy,
shows that trend is one of the most important concepts in technical analysis.
The meaning in finance isn't all that different from the general definition of the
term, a trend is really nothing more than the general direction in which a
security or market is headed. For example, see the chart below: It isn't hard to
see that the trend in the above Figure is up. However, it's not always this easy
to see a trend:

Figure 6. Clear trend


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Figure 7. Unclear trend

There are lots of ups and downs in this chart, but there isn't a clear
indication of which direction this security is headed. Unfortunately, trends are
not always easy to see. In other words, defining a trend goes well beyond the
obvious. In any given chart, you will probably notice that prices do not tend to
move in a straight line in any direction, but rather in a series of highs and
lows. In technical analysis, it is the movement of the highs and lows that
constitutes a trend. For example, an uptrend is classified as a series of higher
highs and higher lows, while a downtrend is one of lower lows and lower
highs.
Types of Trend
There are three types of trend:

Uptrends, Downtrends and

Sideways/Horizontal Trends As the names imply, when each successive peak


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and trough is higher, it's referred to as an upward trend. If the peaks and
troughs are getting lower, it's a downtrend. When there is little movement up
or down in the peaks and troughs, it's a sideways or horizontal trend. If you

want to get really technical, you might even say that a sideways trend is
actually not a trend on its own, but a lack of a well-defined trend in either
direction. In any case, the market can really only trend in these three ways:
up, down or nowhere.
Trend Lengths
Along with these three directions, there are three trend classifications.
A trend of any direction can be classified as a long-term trend, intermediate
trend or a short-term trend. In terms of the stock market, a major trend is
generally categorized as one lasting longer than a year. An intermediate trend
is considered to last between one and three months and a near-term trend is
anything less than a month. A long-term trend is composed of several
intermediate trends, which often move against the direction of the major trend.
If the major trend is upward and there is a downward correction in price
movement followed by a continuation of the uptrend, the correction is
considered to be an intermediate trend. The short-term trends are
components of both major and intermediate trends. Take a look the below
Figure to get a sense of how these three trend lengths might look.


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Figure 8. Trend Length

When analyzing trends, it is important that the chart is constructed to
best reflect the type of trend being analyzed. To help identify long-term trends,
weekly charts or daily charts spanning a five-year period are used by chartists
to get a better idea of the long-term trend. Daily data charts are best used
when analyzing both intermediate and short-term trends. It is also important to
remember that the longer the trend, the more important it is; for example, a
one-month trend is not as significant as a five-year trend.

Trend lines
A trend line is a simple charting technique that adds a line to a chart to
represent the trend in the market or a stock. Drawing a trend line is as simple
as drawing a straight line that follows a general trend. These lines are used to