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There are so many questions on people’s minds today with the PSEi trading as high as 4997.04 and closing at 4893.48.  The swing for the day was around 104 points or a 2.2 percent swing up and down.  Just as when people thought the market would assault the 5,000 barrier, the market not only took back the day’s gain but even eroded a good part of yesterday’s.  I think that many technical traders saw 5,000 as a nearby resistance to this rally that had its roots around November 2011 when the index was around 4,200.

Here is an analysis shared by one broker/analyst who traded very heavily today.  This should also answer questions bugging the holders of stocks like DIZ, OPM and OV.

Essentially, the spark of the sell-off was AEV due to a market talk of a possible merger between UBP and BPI or RCB.  Given the wide bid/ask spread of AEV, the stock rocketed to Php 59.9 contributing 56 points to the index and the PSEi hit all-time high.  Some analyst had placed AEV’s NAV to be around 60 should UBP end up in a merger at twice its book value.  It is not unusual that when a target price is reached, both swing and arbitrage traders would start to sell.  Similarly, the sell targets foreign algorithm traders were likely triggered.  The price which was .10 shy of 60 was too attractive to resist prompting the drop since the rise in AEV appeared to have been exacerbated by the speculation of a merger.  UBP swung from a low of 90 to a high of 125 putting AEV completely out of whack.  The move in AEV gave the rest of the market an excuse to take profits simply because so much profits have been made in all sectors of the market.  Of course, in a profit-taking sell-off, hardly anyone is spared.  Stocks that have been trading at their all time high – and there are many of them – were sold as both traders and fund managers moved to protect earlier gains.  Practically all index stocks –  ALI, BPI, SM, BDO, SMPH, DMC, ICT, JGS, MWC – ended in red.  Only a few like AC, MBT, PX and URC remained green although they traded much higher in the morning.

Remember, we closed 2011 at 4372 and today’s high of 4997 was already a 14.3 percent YTD rise; and February is not even over.  In my opinion, this is a very welcome correction all around.  I think traders and even fund managers were already ignoring values and were simply buying in order not to be left behind.  With a profit taking move like today’s, most sane investors will bring their analysis closer to reality and not merely rely on the liquidity that has so far been driving the market.  This should also give those who were not able to chase prices a chance to enter the market or increase their investments at lower prices.  We have seen major corrections of rallies before and they only serve to make future price gains stronger.  After all, it is the soundness of the markets fundamentals that enable values and prices to emerge.  I believe the economy’s fundamentals remain intact.

What does this do to theme stocks in mining and oil such as DIZ, NI, ORE, OV and OPM?  Inevitably, prices cannot just go one way.  The trend is your friend, but trends normally gets sustained when healthy corrections occur.  In fact, stock prices are able to push further when price supports get established when swing traders make their exit.  NI for one was not badly affected by the sell-off since it appeared to have been consolidating it very strong move from the beginning of the year.  ORE in fact closed 2.74% higher today which is a reflection of the buying support by investors for this stock.  The move DIZ has been relentless over the last three weeks with phenomenal rises over the last few days.  I think the profit taking has done it good because the stock has a very firm base of investors and the slippery hands have been squeezed out by this correction.

For OV and OPM, I think those who went into these stocks were looking to the second quarter of the year for the bigger move to come.  This is when exploration and drilling activities would commence.  Oil stocks in any country are always volatile especially those which are involved in exploration.  Those who trade this sector must understand this.  There is risk and there is reward, but in oil stocks the swing of risk into reward is usually wide.  My view is that the sector has just started its move, just like mining started its move last year.  The horses have just left the starting gate.  When you bet on a horse race, you psych yourself up that you placed your money on the right horse.  If you win, the pay-off is high; but if you lose, you have nothing left.  In betting on oil stocks, your pay-off could be as high; but if it does not work out, you still have money left.  The risk reward ratio is not so bad after all.  Nevertheless, the risk of losing is real; that is why we also have to get real.  Personally, I think the race is still being run on OV and possibly OPM; however, it is not for the faint of heart.

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