PSEi: Time to buy or bail out?

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PSEi bell

Perhaps unnoticed by most pundits, the Philippine Stock Exchange Index (PSEi) suffered one of its worst weekly bloodbaths right after Rolls-Royce celebrated the opening of its Philippine branch. In a cocktail party as iconic as the brand itself, the Manila Penn ballroom venue was packed with towering Brazilian models, rich Filipino-Chinese and the obviously well-heeled, all who imbibed, between frozen cocktail smiles, free flowing champagne. I too enjoyed and consumed freely the alcohol, not aware of the morning-after nausea to come.

For right after the party, the next three days felt like an endless hangover as the market plunged more than 900 points in a violent tailspin. Last Tuesday was ticker tape crucial as the market took off from session lows, marking a significant intraday reversal which set the tone for our 5.7% rise the next trading day after. On this note, we may have bottomed that bloody Tuesday as the corrective cycle which started in mid-May, with an ominous double top, increased in momentum and speed only to climax early this week.

For the first time since this specific bull market cycle started in 2009 at a level of 1747 PSEi (i.e. our sub-prime bottom), I actually saw capitulation and fear yesterday as retail investors dumped shares at the bottom, below the 5,800’s bear market territory.

So the question lingering in everyone’s mind is what to make of this recent market rout – are we in a bull market still, or in a bear market? Or as one Makati yuppie would try and reassure me, “Oh, it’s just a correction within a bull market.”

Perhaps it is. For someone like me who has followed the Philippine stock market since the 1990’s, and has actually managed the stock portfolio’s of the PAL Pilots Retirement Fund and the Meralco Foundation at some points in my career, let me venture a guess.

People who point out what FED Chairman Ben Bernake said – a cliff-drop end to the US’s stimulus programme — as the primary reason for the rout are just stating the obvious. The markets already knew that some QE tapering off was to eventually happen. The only difference this time was the fact that most emerging markets, especially our outperforming PSEi, were already susceptible, if not 9-months pregnant for some serious profit taking. In fact, Bernake’s hint of a likely mid-2014 timetable was completely missed out by a market already decided on some cashing out.

PSEi chart
(Click to enlarge)

Not convinced?  Okay, let me put it this way. One school of thought would be of the belief that markets reacts logically to any news that comes out. That markets go up and down depending on the severity of the news, for good or for bad. Good news makes markets go up proportionately, and directionally the other way for any bad news.

Well, after years of trading stocks, this kind of thinking is way too simplistic for me. I believe that markets actually move technically and not always proportionately to the news, depending on its own cycles and timing. At the latter stages of a bull run, and this has been the Philippine scenario many times, the trajectory becomes more parabolic and hectic, prices levitate to a level where it is highly susceptible to serious profit taking (such as a month ago). The following unexpected correction that catches every one off guard is often accompanied by pundits who try to find plausible reasons for it and what they say is only partly true. Equally so, in the parabolic stage of that bull run (before the balloon burst), bad news is actually ignored and deferred by the market for future digestion.

Take a look the PSEi Chart 2001 to 2011 above. You will see that at the early stages of this PSEi’s 2009 to 2013 bull cycle, sometimes in 2010, the PSEi dropped about 15 per cent from the top, twice. These corrections happened because of the tsunami in Japan and the Euro zone crisis, namely Greece and Portugal. These were very serious issues, and yet the market only dropped about 15 per cent in both times, while on this recent rout, we see a 26 per cent percent market collapse — and on a piece of news the market already instinctively knew. The only difference really is that this time around we were at our last stages of pregnancy.

Having said that, the question comes up: What does this all means going forward?

On this note, I look back to 2007- 2008, which is a time period also conveniently accessible on the same chart above. There is an obvious parallelism here. The PSEi was flying when it suddenly underwent the same correction of about 26 per cent:  PSEi 3,800 down to 2,800 in a matter of days.

Technically, the reason why the correction this time around was this severe was that while we are still in a bull market, the bullish cycle is also about to come to a close. Given that Elliot Wave Theory only has a 5 wave count, we are clearly in the remaining stages of this bull market, having concluded wave 3 (upwards) to PSEi 7,400 last May, just underwent the corrective wave 4 (a 26 per cent drop just like in 2007), and soon to move to our final “after party” — an upward moving wave 5. Technically, this wave 5 can last until December 2013, as it can go the same distance as wave 1.

If Elliot is right, the bull market cycle we are in is clearly not over. However, once wave 5 has extended itself, just like in 2007, we have to reckon with Elliot’s scary down waves A, B and C.

Let me just end by saying this: You don’t want to be caught by those letters. The massive bear market that followed in 2009 makes even a 26 per cent correction feel like a good day.

(Tony Herbosa is a contributor for Inside Investor. The opinions expressed are his own.)

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Reading Time: 4 minutes

Reading Time: 4 minutes

PSEi bell

Perhaps unnoticed by most pundits, the Philippine Stock Exchange Index (PSEi) suffered one of its worst weekly bloodbaths right after Rolls-Royce celebrated the opening of its Philippine branch. In a cocktail party as iconic as the brand itself, the Manila Penn ballroom venue was packed with towering Brazilian models, rich Filipino-Chinese and the obviously well-heeled, all who imbibed, between frozen cocktail smiles, free flowing champagne. I too enjoyed and consumed freely the alcohol, not aware of the morning-after nausea to come.

For right after the party, the next three days felt like an endless hangover as the market plunged more than 900 points in a violent tailspin. Last Tuesday was ticker tape crucial as the market took off from session lows, marking a significant intraday reversal which set the tone for our 5.7% rise the next trading day after. On this note, we may have bottomed that bloody Tuesday as the corrective cycle which started in mid-May, with an ominous double top, increased in momentum and speed only to climax early this week.

For the first time since this specific bull market cycle started in 2009 at a level of 1747 PSEi (i.e. our sub-prime bottom), I actually saw capitulation and fear yesterday as retail investors dumped shares at the bottom, below the 5,800’s bear market territory.

So the question lingering in everyone’s mind is what to make of this recent market rout – are we in a bull market still, or in a bear market? Or as one Makati yuppie would try and reassure me, “Oh, it’s just a correction within a bull market.”

Perhaps it is. For someone like me who has followed the Philippine stock market since the 1990’s, and has actually managed the stock portfolio’s of the PAL Pilots Retirement Fund and the Meralco Foundation at some points in my career, let me venture a guess.

People who point out what FED Chairman Ben Bernake said – a cliff-drop end to the US’s stimulus programme — as the primary reason for the rout are just stating the obvious. The markets already knew that some QE tapering off was to eventually happen. The only difference this time was the fact that most emerging markets, especially our outperforming PSEi, were already susceptible, if not 9-months pregnant for some serious profit taking. In fact, Bernake’s hint of a likely mid-2014 timetable was completely missed out by a market already decided on some cashing out.

PSEi chart
(Click to enlarge)

Not convinced?  Okay, let me put it this way. One school of thought would be of the belief that markets reacts logically to any news that comes out. That markets go up and down depending on the severity of the news, for good or for bad. Good news makes markets go up proportionately, and directionally the other way for any bad news.

Well, after years of trading stocks, this kind of thinking is way too simplistic for me. I believe that markets actually move technically and not always proportionately to the news, depending on its own cycles and timing. At the latter stages of a bull run, and this has been the Philippine scenario many times, the trajectory becomes more parabolic and hectic, prices levitate to a level where it is highly susceptible to serious profit taking (such as a month ago). The following unexpected correction that catches every one off guard is often accompanied by pundits who try to find plausible reasons for it and what they say is only partly true. Equally so, in the parabolic stage of that bull run (before the balloon burst), bad news is actually ignored and deferred by the market for future digestion.

Take a look the PSEi Chart 2001 to 2011 above. You will see that at the early stages of this PSEi’s 2009 to 2013 bull cycle, sometimes in 2010, the PSEi dropped about 15 per cent from the top, twice. These corrections happened because of the tsunami in Japan and the Euro zone crisis, namely Greece and Portugal. These were very serious issues, and yet the market only dropped about 15 per cent in both times, while on this recent rout, we see a 26 per cent percent market collapse — and on a piece of news the market already instinctively knew. The only difference really is that this time around we were at our last stages of pregnancy.

Having said that, the question comes up: What does this all means going forward?

On this note, I look back to 2007- 2008, which is a time period also conveniently accessible on the same chart above. There is an obvious parallelism here. The PSEi was flying when it suddenly underwent the same correction of about 26 per cent:  PSEi 3,800 down to 2,800 in a matter of days.

Technically, the reason why the correction this time around was this severe was that while we are still in a bull market, the bullish cycle is also about to come to a close. Given that Elliot Wave Theory only has a 5 wave count, we are clearly in the remaining stages of this bull market, having concluded wave 3 (upwards) to PSEi 7,400 last May, just underwent the corrective wave 4 (a 26 per cent drop just like in 2007), and soon to move to our final “after party” — an upward moving wave 5. Technically, this wave 5 can last until December 2013, as it can go the same distance as wave 1.

If Elliot is right, the bull market cycle we are in is clearly not over. However, once wave 5 has extended itself, just like in 2007, we have to reckon with Elliot’s scary down waves A, B and C.

Let me just end by saying this: You don’t want to be caught by those letters. The massive bear market that followed in 2009 makes even a 26 per cent correction feel like a good day.

(Tony Herbosa is a contributor for Inside Investor. The opinions expressed are his own.)

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