Stock price behavior-validity of EMH in weak-form

The weak form of the EMH asserts that the current price fully incorporates information contained in the past history of prices only i.e. nobody can detect mis-priced securities and “beat” the market by analyzing past prices. The weak form of the hypothesis got its name for a reason - security prices are arguably the most public as well as the most easily available pieces of information. Thus, one should not be able to profit from using something that “everybody else knows”. On the other hand, many financial analysts attempt to generate profits by studying exactly what this hypothesis asserts is of no value - past stock price series and trading volume data. This technique is called technical analysis. The empirical evidence for this forms of market efficiency, and therefore against the value of technical analysis, is pretty strong and quite consistent. After taking into account transaction costs of analyzing and of trading securities, it is very difficult to make money on publicly available information such as the past sequence of stock prices. The weak-form of EMH assumes that current stock prices fully reflect all the historical information, including past returns. Thus investors would gain little from technical analysis, or the practice of studying a stock's price chart in an attempt to determine where the stock price is about to go in the future. Excess returns cannot be earned by using investment strategies based on historical share prices. Weak-form efficiency implies that technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns.