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There
are two wonderfully picturesque and graphic stock market
clichés that adequately describe the current state of
the Philippine Stock Exchange (PSE): “dead cat bounce”
and “catching a falling knife.”
Say
those two phrases slowly out loud and you will have a
clear mental picture of our stock-market trading these
last seven months.
The
phrase about dead cats was born in
Southeast Asia to describe a brief rally after a spectacular decline
in the
Singapore
and Malaysian stock exchanges in 1985. The unknown
stockbroker went on to say that, “Even a dead cat will
bounce if it falls from a great height, but that does
not mean it is still alive.” And our dead cat keeps on
bouncing and bouncing. But it is still dead.
In early
November 2007, the Philippine Composite Index traded at
3,800. We have fallen some 1000 points since that time,
losing more than 25 percent. During that period, the
“dead cat” has bounced many times. The pattern has been
predictable; a more or less 10-percent drop followed by
about a 10-percent rise, followed by another 10-percent
fall, eventually putting us where we are now.
Since
the beginning of January, the pattern looks like this;
3,400 down to 3,000, up to 3,300 and down to 2,800, back
up to 3,000 and then down to 2,700, next rising to 2,900
and then back down. That is clearly a “dead cat bounce.”
The
technical pattern on the charts is a descending trend
channel. The key word is “trend.” The stock market is in
a downward trend and no amount of wishing or hoping is
going to change that fact. We are seeing a continuing
pattern of lower highs and lower lows on the index.
Further, significant long-term technical indicators have
been in negative territory for months. And that is not
the worst news. More discouraging is that the indicators
are not severely negative, bringing a small bit of light
at the end of the tunnel. If 50 is the neutral point, we
are looking at numbers around 40. A change in direction
is unlikely to occur until we see the mid-20s to the low
30s.
All
along this path, investors have been trying to catch the
bottom, initiating new buying when it seemed that prices
might be ready to turn up. What they have been doing is
“catching a falling knife.” which is never a pleasant
experience.
The main
stock-exchange composite index, the PSE index, does not
fully reflect the bloodbath of falling prices. Megaworld
has lost more than 50 percent of its value. And MEG is
in good company. Most of the other blue-chip stocks are
nearly in the same position: Ayala Corp. from P620 to
the P350 area, Ayala Land from P16 to P10. Philippine
Long Distance Telephone Co. shareholders have seen
P3,050 become P2,570. Globe followed with a drop from
P1,600 to P1,250. The list is long, with decreases in
prices ranging from 15 percent upward.
Stocks
that have gone against the trend are more than just the
exception; they are almost miracles of the market.
Investors are not talking about how much money they made
in 2008; they are congratulating themselves to have not
lost as much as the next guy.
Every
time buyers thought they saw a glimmer of hope, trying
to “catch the knife” just cut deeper.
As I
have said many times before, the justifications that you
read in the newspapers as to why prices are falling are
meaningless. If you listen to this stock-market babble,
you will lose even more value of your shareholdings.
When you
read that the stock market fell because the global
markets went down or because of fears of Philippine
inflation, you are being conditioned to believe that a
change in these external factors, like the Asian markets
being up, will change the direction of local
stock-market prices. Not going to happen.
For
example, the New York stock market has been in a short-term uptrend since early March. We have
been continuing our downtrend since early March. The
cause of this past Tuesday’s drop of 40 points is not
because the Dow went down Monday night. It is because we
are in a downtrend. If the Dow Jones goes up and we
happen to follow, that does not mean our trend has
changed, and you thinking otherwise will only cause you
more pain.
Financial comments in the press are an attempt to
explain very short-term events while ignoring and
outside of the context of long-term trends. A continuing
series of short-term events creates a long-term trend.
When you see the market up for five days in a row, which
is not a reversal of trend, that is a dead cat bouncing.
Anyone who tells you otherwise is a fool or is fooling
himself.
If you
can look back over the last three months and say that
you wished you would have sold your stock earlier, sell
now, today, if the current price is more than 15 percent
below that previous level. Less than a 15-percent drop,
you should hang on since there is probably a very
positive internal company development that is keeping
the price supported.
A move
to 2,500 to 2,600 on the PSEi is more than likely. It is
almost guaranteed. If that level does not hold, look for
2,300 to 2,000.
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