IT has been several weeks since I made a silly comparison of the stock market to, say, a hot-air balloon. So it is about time to do it again.
The brief daily commentary you read in the newspapers about Philippine Stock Exchange (PSE) trading, and too often from professional analysts, is like a summary of a sporting contest from looking primarily at the score. Then there has to be some sort of justification for the outcome like “The loser’s star player has had some problems all season.”
Certainly, the stock market does occasionally trade both to the upside and the downside in a manner when no explanation is really important. The island-nation of Micronesia has a football team that just got beat at the Pacific Games in Papua New Guinea by Vanuatu by a score of 46-0. What can you really say about that game?
Most of the time, though, the reasons for stock-price movements—even big movements—are much more subtle and varied. But what we hear are statements like “PSEi plunges after Greece referendum” and “Bears continue to dominate the market.”
Are these accurate appraisals of PSE trading? No.
The fact that stock prices dropped after the Greek referendum may be true, but correlation does not imply causation. The PSE has been in a 13-week downtrend, 12 of those weeks before the Greek referendum. During those three months—and until almost the last minute—a debt deal was expected to be reached. But the obvious implication of the headline is the market went down because of the Greek vote. We are told that foreign money is running away from the Philippines because of the turbulence in Europe.
Here’s a news flash: Foreign money has been leaving the PSE for months. I wrote about this when stock prices were at the 7,800 area reaching for 8,000. I said then that, historically, foreign funds flee the Philippines at the wrong time but that this time they might be accurate. Sure, I was optimistic that the momentum at 8,000 would carry us higher and I was wrong, as the market turned down the following week. And I wrote on May 26th that “The PSE is going down” when the index was at 7,700.
One analyst said the reason foreign money was pulling out was because it was moving to Japan and China. Well, if that is the case, then expect the good times to roll soon on the PSE, as China is crashing and in total free fall. But comparing buying at the PSE and buying in China is like comparing mangoes and chickens.
Foreign money has left in part because of complete uncertainty about the Philippine government’s role in the economy.
Conventional wisdom says that if there is buying, stock prices go higher, and that is why we get headlines like “Bears continue to dominate market” when prices go down. It is not that simple any more than saying “clouds cause rain.” Yes, you need clouds for rain, but not white fluffy clouds. Even mean dark clouds will not necessarily cause rain if they blow through too fast.
The problem with share prices is not that there are too many “bears” selling, it is that the buying “bulls” are in hibernation. There is always going to be selling for reasons unrelated to the market. Sellers liquidate to raise cash for a thousand reasons. But if buyers are thin, then prices go lower. Average daily volume on the exchange is down significantly in the last month.
The stock market is like a sailing ship. No matter how good the ship is, the only two things that matter are the rudder that determines direction and the wind that gives propulsion. The “rudder” is like the dominance of buyers versus sellers. Exchange volume is the “wind” for the market. And the PSE sails are empty. Just like a sailing ship, if there is no wind the market drifts on to the rocky reef of lower prices.
Now comes the thorny question of why buyers are on the sidelines. Greece? China? Fear for the future?
While we did have a price rally from about 7,300 to 7,700 three weeks ago, here it was an absence of sellers rather than overwhelming buying that pushed prices higher. At 7,700, strong selling did not push prices down; a lack of buying did.
I believe that this is all part of the “Third-quarter trauma” that I keep talking about. Here in the Philippines, no one is really sure about the direction we are moving to, so we drift lower. The up-then-down with a negative bias style movement in June may continue. Eventually, a longer-term trend will be resolved. When we reach a bottom where buyers come in, it will have nothing to do with the headlines and you will know it.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.