Technical Analysis of Saudi Equity Market Stocks Report

Introduction

The technical analysis of four different stocks listed on the Saudi equity market – Tadawul included calculation of exponential moving and simple moving averages. The following report discusses results of the technical analysis conducted, and also provides profiles of selected companies.

Corporate Profiles

Sabic

Saudi Basic Industries Corporation (Sabic) is one of the versatile business groups of operating in Saudi Arabia (“Saudi Basic Industries Corp” par. 1). The company uses by-products ofs the petrochemical industry to develop different products (“Sabic – Corporate Profile” par. 1).

Saudi Telecom Company

Saudi Telecom is a leading telecom and Internet service providing company in Saudi Arabia (“Saudi Telecom Co” par. 1). The company provides up-to-date technologies and services making it one of the competitive companies in the global telecom sector (“Saudi Telecom – Investor Relations” par. 1).

Jarir Marketing Company

Jarir Marketing Company supplies books, stationery, office machines, computer and engineering accessories and equipment (Jarir Marketing Co par. 1). The company also operates a chain of bookstores in Saudi Arabia and its neighboring countries (“Jariri Bookstore – Company Information” par. 1).

Northern Region Cement Company

Northern Region Cement Company started its operations in 2006 (“Northern Region Cement Co” par. 1). The company produces all types of cement and building materials (“Northern Region Cement Co” par. 1).

Stock Price Data

The stock prices were collected for all four companies from Tadawul’s website. The data was collected for 75 days from January 26, 2014 to May 8, 2014.

Moving Average

A moving average is used to smooth out variations / fluctuations observed in historical stock prices. It also identifies different levels of support and resistance. A simple moving average calculates the arithmetic average of stock prices (Edwards, Magee and Bassetti 135). For the current analysis, a simple moving average was calculated using stock prices for a period of eight days. By comparing the simple moving average and stock prices investment decisions were made. If the stock price was higher than the SMA, then a ‘long’ position was taken. On the other hand, if the stock price was lower than the SMA then a ‘short’ position was taken (Baiynd 10). The total gain or loss was calculated by accumulating gains and losses resulting from buy and sell decisions taken on different dates. The return was determined by dividing the total gain or loss by the first trading gain or loss.

An exponential moving average (EMA) considers stock prices over longer time interval and determines the trend in stock prices. The 8-period exponential moving average was used for the technical analysis of stocks. Similar to the simple moving average indicator, buy and sell decisions were taken based on the comparison of stock prices and EMA. If the stock price went above EMA, then a ‘long’ decision was taken. On the other hand, if the stock price went below EMA, then a ‘short position was taken (Baiynd 10). Moreover, the total gain or loss was calculated by summing gains and losses resulting from buy and sell decisions taken on different dates. The return was determined by dividing the total gain or loss by the first trading gain or loss made using the EMA indicator.

Buy and Hold Strategy

A Buy-and-hold strategy is a simple approach that allows the investor to buy a stock and holds it for a long period. In this way, the investor is able to avoid sudden fluctuations in stock prices. Typically, this strategy results in higher returns for the investor who holds a ‘long’ position in stocks for a long period and sells stocks after completion of the holding period (Chande 97). In order to implement this strategy, a ‘long’ position was taken after first eight days of trading and then a ‘short’ position was taken at the end of the analysis period. The return from trading was calculated by determining percentage change in stock prices.

Technical Analysis

Sabic

On February 4, 2014, the exponential moving average was SR 112.5938, which was higher than the stock price (SR 111.75). On February 16, 2014, the stock price was SR 113.25, which was greater than exponential moving average (SR 112.093). On this date, a ‘long’ position was taken that led to loss of SR 113.25. On March 3, 2014, the stock price was SR 113.25, which was less than the exponential moving average and, therefore, the decision to enter a ‘short’ position was taken. Similarly, there were buy and sell positions entered on different dates based on stock prices and exponential moving averages. A total gain of SR 3.67 was recorded at the end of the trading period, which indicated a positive return of 3.28%.

On February 4, 2014, the simple moving average was SR 112.5938, which was higher than the current stock price (SR 111.75). On February 6, 2014, the SMA felt below the stock price and a ‘long’ position was taken. On this date, loss of SR 111.75 was recorded. However, on March 3, 2014, the stock price felt below the SMA and a ‘short’ position was taken which resulted in gain of SR 113.25. For the remaining days of trading, gains and losses were recorded. A total gain of SR 3.15 was recorded at the end of the trading period, which indicated a positive return of 2.82%.

On February 4, 2014, a ‘buy-and-hold’ strategy was implemented by taking a ‘long’ position in the company’s stocks at SR 111.75 and later on May 8, 2014, a ‘short’ position was taken at the stock price of SR 118.96. A total gain of SR 7.21 was recorded, which indicated a positive return of 6.45%.

Saudi Telecom Company

On February 4, 2014, the exponential moving average was SR 60.5625, which was higher than the stock price (SR 61.25). On this date, a ‘long’ position was taken that led to loss of SR 61.25. On February 20, 2014, the stock price was SR 113.25, which was less than the exponential moving average and, therefore, the decision to enter a ‘short’ position was taken. Similarly, there were buy and sell positions entered on different dates based on stock prices and exponential moving averages. A total gain of SR 2.43 was recorded at the end of the trading period, which indicated a positive return of 3.97%.

On February 4, 2014, the simple moving average was SR 60.5625, which was higher than the current stock price (SR 61.25). On this date, the SMA felt below the stock price and a ‘long’ position was taken that led to loss of SR 61.25. However, on February 6, 2014, the stock price felt below the SMA and a ‘short’ position was taken which resulted in gain of SR 60.5. For the remaining days of trading, gains and losses were recorded. A total loss of SR 3.68 was recorded at the end of the trading period, which indicated a negative return of 6.01%.

On February 4, 2014, a ‘buy-and-hold’ strategy was implemented by taking a ‘long’ position in the company’s stocks at SR 61.25 and later on May 8, 2014, a ‘short’ position was taken at the price of SR 67.59. A total gain of SR 6.34 was recorded, which indicated a positive return of 10.47%..

Jarir Marketing Company

On February 4, 2014, the exponential moving average was SR 174.9236, which was higher than the stock price (SR 172.50). On February 6, 2014, the stock price was SR 176.50, which was greater than exponential moving average (SR 174.4961). On this date, a ‘long’ position was taken that led to loss of SR 176.50. On February 19, 2014, the stock price was SR 176.25, which was less than the exponential moving average and, therefore, the decision to enter a ‘short’ position was taken. Similarly, there were buy and sell positions entered on different dates based on stock prices and exponential moving averages. A total gain of SR 15.04 was recorded at the end of the trading period, which indicated a positive return of 8.52%.

On February 4, 2014, the simple moving average was SR 174.9236, which was higher than the current stock price (SR 176.50). On February 6, 2014, the SMA felt below the stock price and a ‘long’ position was taken. On this date, loss of SR 176.50 was recorded. However, on February 17, 2014, the stock price felt below the SMA and a ‘short’ position was taken which resulted in gain of SR 176.25. For the remaining days of trading, gains and losses were recorded. A total gain of SR 16.58 was recorded at the end of the trading period, which indicated a positive return of 9.39%.

On February 4, 2014, a ‘buy-and-hold’ strategy was implemented by taking a ‘long’ position in the company’s stocks at SR 172.50 and later on May 8, 2014, a ‘short’ position was taken at the stock price of SR 201.48. A total gain of SR 28.98 was recorded, which indicated a positive return of 16.80%.

Northern Region Cement Company

On February 4, 2014, the exponential moving average was SR 23.656, which was higher than the stock price (SR 24.05). On this date, a ‘long’ position was taken that led to loss of SR 24.05. On March 3, 2014, the stock price was SR 24.8, which was less than the exponential moving average and, therefore, the decision to enter a ‘short’ position was taken. Similarly, there were buy and sell positions entered on different dates based on stock prices and exponential moving averages. A total gain of SR 2.03 was recorded at the end of the trading period, which indicated a positive return of 8.44%.

On February 4, 2014, the simple moving average was SR 23.656, which was higher than the current stock price (SR 24.05). On this date, the SMA felt below the stock price and a ‘long’ position was taken that led to loss of SR 24.05. However, on February 13, 2014, the stock price felt below the SMA and a ‘short’ position was taken which resulted in gain of SR 24.55. For the remaining days of trading, gains and losses were recorded. A total loss of SR 1.18 was recorded at the end of the trading period, which indicated a negative return of 4.91%.

On February 4, 2014, the ‘buy-and-hold’ strategy was implemented by taking a ‘long’ position in the company’s stocks at SR 24.05 and later on May 8, 2014, a ‘short’ position was taken at the price of SR 24.58. A total gain of SR 1.23 was recorded, which indicated a positive return of 5.11%..

Conclusion and Recommendations

The results of the technical analysis are provided in the following table.

Table 1: Summary of results.

The technical analysis indicated that the return on the “buy-and-hold” strategy was the highest. Moreover, the SMA strategy had the lowest return for all companies excluding Jarir Marketing Co. The results were consistent with the information provided by Chande. Investors holding their ‘long’ positions for a long period are able to earn higher returns on their investment. They can avoid fluctuations in stock prices and maximize their returns. Preis, Moat and Stanley also proved that the ‘buy-and-hold’ strategy yields higher returns for investors in the long term (Preis, Moat and Stanley par. 12). Other indicators including exponential and simple moving averages resulted in smaller gains in the case of Sabic, Jarir Marketing Co. and Northern Region Cement Co. In the case of Saudi Telecom losses were recorded in trading using these indicators. Moreover, the EMA strategy is considered better than the SMA strategy because it focuses on recent stock prices (Baiynd 10). From the technical analysis, it could also be inferred that different strategies generate varying results from trading. These differences could be due to several other factors that affect stock price movements.

On the basis of the above analysis, a ‘buy-and-hold’ position in Jarir Marketing Co.’s stocks is recommended as it generated higher returns for the investor as compared to other strategies and companies. It was indicated that trading strategies based on moving averages resulted in low returns for the selected stocks and even led to a trading loss in the case of Saudi Telecom Company. Moreover, it is suggested that a ‘buy-and-hold’ strategy does not always generate higher returns as claimed in different studies. The technical analysis supported by the fundamental analysis could be considered as a better approach to trading in stocks.

Works Cited

Baiynd, Anne-Marie. The Trading Book Course: A Practical Guide to Profiting with Technical Analysis. New York: McGraw Hill Professional, 2013. Print.

Chande, Tushar S. Beyond Technical Analysis: How to Develop and Implement a Winning Trading System. New York: John Wiley & Sons, 2001. Print.

Edwards, Robert D., John Magee and W.H.C. Bassetti. Technical Analysis of Stock Trends. 9th. Boca Raton: CRC Press, 2007. Print.

“Jariri Bookstore – Company Information”. Jarir Bookstore, 2014. Web.

“Jarir Marketing Co”. Bloomberg, 2014. Web.

“Northern Region Cement Co”. Bloomberg, 2014. Web.

“Northern Region Cement Co”. Web Northern Region Cement Co, 2014. Web.

Preis, Tobias, Helen Susannah Moat and H. Eugene Stanley. Quantifying Trading Behavior in Financial Markets Using Google Trends. 2013. Web.

“Saudi Basic Industries Corp”. Bloomberg, 2014. Web.

“Saudi Telecom Co”. Bloomberg, 2014. Web. .

“Sabic – Corporate Profile”. Web Sabic, 2014. Web.

“Saudi Telecom – Investor Relations”. Web Saudi Telecom, 2014. Web.