A SURVEY OF STOCK INDICATORS USED BY STOCKBROKERS, INVESTMENT BANKS AND MUTUAL FUNDS AT THE NAIROBI STOCK EXCHANGE (NSE) ^ SUBMITTED BY /NYALLE LAWRENCE D61/P/9018/04 A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT FOR THE AWARD OF MASTERS DEGREE IN BUSINESS ADMINISTRATION (MBA) OF THE UNIVERSITY OF NAIROBI, SCHOOL OF BUSINESS SEPTEMBER 2007 Un've'My ol NAIROBI Library 0306632 1 DECLARATION This MBA research project is my original work and has not been submitted for presentation at the University of Nairobi or any other institution of higher learning SIGNED......................... DATE NYALLE LAWRENCE D61/P/9018/04 This project has been submitted for examination with my approval as the university supervisor SIGNED..............................................................................DATE...!':.tO....... ((*....................... 2 -°^. ' Mr. LUTHER OTIENO ODHIAMBO Lecturer, Department of Finance and Accounting University of Nairobi, School of Business A survey of stock indicators used by Stockbrokers. Investment Banks and Mutual Funds at the NSE Page I DEDICATION I dedicate this study to my parents who despite having little formal education worked hard to ensure their children got good education. Your support and encouragement has been unequivocal at all times. To you I say thank you very much, and may God bless you abundantly. A survey of stock indicators used by Stockbrokers, Investment Banks and Mutual Funds at the NSE Page II ACKNOWLEDGEMENT This study would not have been possible without the encouragement, support, criticism and assistance of my family, friends, MBA colleagues, lecturers and my supervisor. First, my appreciation goes to my family for their support, assistance and understanding, which served as an encouragement during this study. Second, my appreciation goes to my supervisor Mr. Luther Otieno Odhiambo for the advice, suggestions, criticism and encouragement during the study. Their significance cannot be over emphasized. My gratitude goes to Martin Karani and Pius Ng’ang’a for their invaluable assistance and suggestions that served to enrich this study. My thanks go to my MBA colleagues Peter Chege, Grace Misyili, Regina Ngyema, Kathleen Chepkemboi, George Omuya, Elizabeth Lwali, Rebecca Nekesa, Joan Karuga, Jacob Munyi and Norman Shitote. The discussions, brainstorming sessions and cooperation we shared through out the MBA program were special. 1 enjoyed your company at all times which 1 found fruitful and fulfilling. To you all I say thank you so much, and may God bless you abundantly. Finally, I thank all organizations that responded to the questionnaire during the fieldwork. A survey of stock indicators used by Stockbrokers, Investment Banks and Mutual Funds at the NSE Page III LIST OF TABLES Name Description Page 1 Table Summary of the Interpretation Criteria on the Extent of Usage 32 4.1.1 of Stock Indicators at the NSE 2 Table Results of the Extent of Usage of Stock Indicators at the NSE 35 4.1.2 3 Table Summary of the Interpretation Criteria on the Profile of a Firm 36 4.2.1 as an Influence on the Choice of Stock Indicators at the NSE 4 Table Results of the Profile of a Firm as an Influence on the Choice 37 4.2.2 of Stock Indicators at the NSE A survey of stock indicators used by Stockbrokers. Investment Banks and Mutual Funds at the NSE Page IV ACRONYMS AND ABBREVIATIONS ADR American Depository Receipts AMEX American Stock Exchange CMA Capital Markets Authority LTD Limited NASDAQ National Association of Securities Dealers Automatic Quotation System NSE Nairobi Stock exchange NYSE New York stock exchange STD Standard S&P 500 Standards and Poor’s 500 Index US$ United States Dollar A survey of stock indicators used by Stockbrokers, Investment Banks and Mutual Funds at the NSE Page V ABSTRACT Traders and investors use stock indicators to make investment decisions. The stock indicators used by these players at the Nairobi Stock Exchange (NSE) are not known yet. This study determines the nature and extent of usage of stock indicators by Stockbrokers, Investment Banks and Mutual Funds at the NSE. Additionally, it determines the influence of the profile of a firm on the choice of stock indicators used at the NSE. This study is necessary because it takes the first step in determining the cross-sectional relationship between stock indicators and stock prices at the NSE. Additionally, no such study has been done at the NSE. A linker! scale was used to collect data on the profile and usage of stock indicators from the population of study that was comprised of 13 Stockbrokers, 5 Investment Banks and 6 Mutual Funds trading in the NSE during the years 2000 to 2006. Seventeen out of 24 firms in the population responded to the questionnaire representing a response rate of 71%. Mean, standard deviation, skewness, kurtosis and the Pearson’s chi-square goodness of fit tests were performed on the data collected. The analysis showed that Price Averages were the mostly used stock indicators while market indicators like the Coppock Indicator were among the stock indicators not used at all. The results of the chi-square test showed that the profile of the firm does not influence the choice of stock indicators used at the NSE. The policy implications of this study are the role the NSE & other interested parties should play in regulation of Stockbrokers, Investment Banks and Mutual Funds. The study provides an outline for developing guidelines to enhance the efficiency and effectiveness of the players and the NSE. The policy implications may be generalizable to emerging markets in Africa that arc small in size and with nil or limited international integration. A survey of slock indicators used by Stockbrokers. Investment Banks and Mutual Funds at the NSE Page VI TABLE OF CONTENTS DECLARATION....................................................................................I DEDICATION.......................................................................................II ACKNOWLEDGEMENT...................................................................Ill LIST OF TABLES............................................................................... IV ACRONYMS AND ABBREVIATIONS............................................V ABSTRACT.........................................................................................VI 1.0 INTRODUCTION.............................................................................1 1.1 Background of the Study...................................................................1 1.1.1 Technical Indicators..................................................................3 1.1.2 Market Indicators......................................................................5 1.2 Research Study..................................................................................8 1.2.1 Statement of the Problem.........................................................8 1.2.2 Objectives of the Study.......................................................... 10 1.2.3 Importance of the Study..........................................................11 1.2.4 Assumptions of the Study.......................................................11 1.3 Overview of the Report...................................................................11 2.0 LITERATURE REVIEW.............................................................. 13 2.1 The Predictive Power of Stock Indicators..................................... 13 2.2 The Predictive Content of Some Leading Economic Indicators.......................................................................16 2.3 Filter Rules and Stock Market Trading......................................... 19 2.4 Factors Influencing the Choice of Stock Indicators.....................24 3.0 RESEARCH METHODOLOGY.................................................25 3.1 Studies on Stock Indicators and Stock Trading.......................... 25 3.2 Research Setting............................................................................25 A survey of slock indicators used by Stockbrokers. Investment Banks and Mutual Funds at the NSE Page VII 3.3 Population of Study......................................................................26 3.4 Sample Size..................................................................................26 3.5 Data Collection.............................................................................26 3.6 Data Specification........................................................................27 3.7 Data Analysis............................................................................... 28 4.0 DATA ANALYSIS, INTERPRETATION OF FINDINGS AND DISCUSSIONS...................................................................32 4.1 Results of the Extent of Usage of Stock Indicators at the NSE.................................................................................... 32 4.2 Results of the Profile of a Firm as an Influence on the Choice of Stock Indicators used at the NSE...........................................36 5.0 SUMMARY, CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS OF THE STUDY, POLICY IMPLICATIONS AND SUGGESTIONS FOR FURTHER RESEARCH..................................................39 5.1 Summary, Conclusions and Recommendations of the Study................................................................................39 5.2 Limitations of the Study............................................................40 5.3 Policy Implications of the Study.............................................. 41 5.4 Suggestions for Further Research............................................42