Semi-strong form efficiency is a class of EMH (Efficient Market Hypothesis) that implies all public information is calculated into a stock's current share price, meaning neither fundamental nor technical analysis can be used to achieve superior gains. This class of EMH suggests only information not publicly available can benefit investors seeking to earn abnormal returns on investments. All other information is accounted for in the stock's price and no amount of fundamental or technical analysis achieves superior returns.
There are two main forms of security analysis: fundamental and technical. Fundamental analysts research trends in business performance metrics, such as sales and earnings growth, since these are believed to be precursors to share price movement. In other words, they believe business performance dictates price. Technical analysts are only interested in historical price action, not business performance. Technicians spend hours looking for trends and patterns in price to confirm share price movements. There is also a group of people who believe both fundamental and technical analysts are akin to psychics. These folks believe in a theory referred to as the efficient market hypothesis, which states the market is ubiquitous and no amount of analysis can help investors achieve alpha returns.
The market is a reflection of its participants. This is the belief system at the foundation of the efficient market hypothesis, a theory that believes in the market's ability to be all knowing, and therefore unbeatable. Analysts who believe stocks are overvalued or undervalued are wrong because the market always knows the right value to assign a stock, or so the efficient market hypothesis theory states. There are degrees of faith around this theory; however, and they are referred to as the weak, semi-strong and strong forms. The semi-strong form falls in the middle.
Understanding the weak and the strong forms of EMH helps to define the semi-strong form. The weak form believes in the efficient market hypothesis but also believes the market's analysis abilities are weak and may not be so efficient at times. The strong form believes all public information is known and only insider information can be used to gain advantage over any one market participant. The semi-strong form falls squarely in the middle. It believes the market is efficient with all public information; however, there may be some opportunity to take advantage of market anomalies as well.
While compelling, the semi-strong form of EMH does not take investor exuberance into consideration or the changes in price due to momentum rather than information. The efficient market hypothesis theory remains controversial, and semi-strong form believers are literally at the center of the debate.