7:00am   Monday   June 29, 2009

Since it is the start of the week, let us review Philippine stock market action over the last 2 weeks and put things in perspective.  This market peaked on Monday, June 16 with the PSEi hitting an intra-day high of 2626 and closed the day at 2613.  That was the highest level the index reached since September 29, 2008 when it traded on an intraday high of 2627 and closed 2608.  It was downhill from then until March 17 when a higher low of 1745 was reached.  The lowest low of 1685 was hit on October 28, 2008.

In the last 2 weeks, we saw a 243 point correction to the June 23 close before climbing again to as high as 2509 but closed at 2477.  Is there a similarity since we appear to be hitting a ceiling?   Back in September, the market melt down was very much in progress.  This time around, the market is in recovery mode.  Any similarity is not immediately apparent.

What I find significant is the market’s reflexive reaction to this level of the index – the region around 2625.  In September, values were expected to break up; this time around values are emerging.  The market seem to be asking itself if the discounting process that happened last year resulted in fair value of stocks.  Taking it from that perspective, we can see  that the reason the market has rallied so far was because prices had gone to ridiculously low levels.  Stock prices in March began to reflect terrific value (very cheap) because earnings did not erode as much as the market was discounting.  In fact, companies like GMA7 (GMAP), BPI, MBT, PNB, SCC and  TEL  recorded very impressive results for both full year 2009 and 1Q09.  Earnings did not melt down as originally perceived, therefore, prices have simply adjusted to levels immediately prior to the market meltdown.

So why did the index fail to push beyond the 2326?  Remember, financial markets are always forward looking.  The recent rally had gone to the point that it has shrugged off any further meltdown scenarios.  What it needs to see now are signs that earning will look better moving forward.  Initially, the macroeconomic outlook will need to provide direction because that will be the harbinger for future earnings.  Unfortunately, that looks pretty dodgy at this point.

I would, therefore, subscribe to the view that our market has found a temporary ceiling around 2326.  For the time being, I would sell expensive stocks when the index nears this level.  Question is, when do we buy?  My strategy is to be light on my positions when the index approaches the region around 2600.  Corollarily, I would increase my holdings when it approaches the 2300 level. I would not, nonetheless, ignore individual stock behavior, i.e., if a stock is in overbought or oversold regions, I would sell or buy accordingly.  I always thought that portfolio management is more of an art than a science.  While we follow a lot of numbers and figures, figuring things out is always a matter of subjective appreciation.  That is where the art begins.

The index closed at 2477 which is smack in the middle of  my trading range, so it could go either way.  I would only touch stocks that are trading reasonably below ther one month high.  I will not touch stocks that are trading close to their highs in this rally.  I dare say that I don’t see an upside break out in prices anytime soon.   With enough patience, I can wait for prices come down to my comfort level.  While the market had been driven by liquidity lately, the resistance of the index at 2626 tells me that even a deluge of cash cannot ignore the basics of risk/reward.

Have a good week.


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