Sunday, April 10, 2011

Phisix-Philippine Peso Back In Rhythm

Upon examining the curves developed by institutes using the Harvard method, it becomes apparent that the movement of the money market curve (C Curve) in relation to the stock market curve (A Curve) and the commodity market curve (B Curve) corresponds exactly to what the Circulation Credit Theory asserts. The fact that the movements of A Curve generally anticipate those of B Curve is explained by the greater sensitivity of stock, as opposed to commodity, speculation. The stock market reacts more promptly than does the commodity market. It sees more and it sees farther. It is quicker to draw coming events (in this case, the changes in the interest rate) into the sphere of its conjectures. Ludwig von Mises

The Philippine Phisix made another substantial rally this week (+2.7%) to finally move up to the positive column.

Rotation, Improving Market Breadth and Bull Market Rules

And as we have been saying we see lots of ongoing rotational dynamics in place.


Figure 6: PSE Weekly Performance

Where last week we saw the telecom sectors take the center stage, this week it had been a story of the Property, Industrial and the Mining sector which has elevated the gains of the Phisix.

Last week’s front runner, the service sector led by the telecoms, had a lackluster but still posted a positive performance. The drab performance of this sector could have signified a natural reprieve following the other week’s sizzling performance.

This week’s broad market gains basically lifted most of the sectoral performance which left only the finance and service sector in the red on a year to date basis.

If the bullish momentum should continue over the medium term, which I expect it would, then I expect to see these laggard sectors to do some catching up which should equally lend a boost to the Phisix.

In addition, we see material progress in the market breadth.

Aside from a huge jump in net foreign buying which mostly came from block sales last April 5, we see broader gains through more trades and number of issues traded. Importantly the advance-decline spread has been tilted in favor of the bulls (see figure 7).


Figure 7: Advance-Decline Spread Shows Bullish Breadth

Thus, the rotational dynamics plus several progress in the market internal activities appear to highlight the Philippine Stock Exchange’s current intrinsic bullishness.

Of course mechanical chartists may argue that given the overbought conditions we may see some profit taking. That’s possible. Resolving short term movements, for me, is a matter of luck (noise) than of (signals) skills.

Nevertheless, major trends of bull and bear markets have some shared characteristics which could be translated into one of the many guideposts for market participants.

As prominent US chartist Carl Swelin notes[1], (bold emphasis mine) writes,

In a bull market oversold conditions are seen as a buying opportunity and will usually result in a rally to relieve the condition. When a bull market becomes overbought, it is not usually cause for concern, because corrections from these conditions are often small, and sometimes the market will continue to rally, while the overbought conditions are relieved internally.

In other words, even if the Phisix does correct, it is likely to be short, and it is likely to see internal rotations that would relieve issue specific conditions (not all issues will go down).

The Phisix-Peso Symmetry

Of course the rising Phisix has also been in conjunction with the firming Peso whose dissonance appears to have been finally resolved.

As I earlier wrote[2],

I can see a paradox—a strong Peso and equity outflows—or a meaningful divergence...

These variables appear to imply that the negative foreign trade in the PSE had NOT been repatriated abroad, but possibly rotated into other local assets.

And this perhaps explains the continued strenght of the Peso despite a weak equity market environment. Again, a divergence that is likely to be resolved soon


Figure 8: Phisix-Peso Back in Rhythm

Given the realities of the Philippine financial markets, the Phisix can’t go on a full downswing cycle on a firming Peso. It’s either a bear market that goes with a falling peso or the weakness in the Phisix represents an anomaly relative to the Peso. And that’s the essence of the recent paradox.

Obviously, the asymmetry appears as being resolved in the way have seen it.


Figure 9:[3]: Non Gold Philippine Foreign International Reserves Surge Anew

Nevertheless with the country’s foreign international reserves on a new milestone high, and with the BSP’s reluctance to see the Philippine Peso appreciate meaningfully for political reasons, this only means lots of liquidity[4] will be sloshing throughout the domestic financial system.

This together with artificially suppressed interest rates should also imply that much these money will find their way into various Peso based assets such as those listed in the Philippine stock exchange, real estate or local bonds.

Of course, after financial markets, we get higher (CPI) inflation in the mainstream definition and subsequently public unrest.

[1] Swenlin, Carl, Bull/Bear Market Rules Apply

[2] See Are The Current External Event Risks Signals or Noise?, March 13, 2011

[3], (subscription required) Global Liquidity, April 7, 2011

[4] See Questions and Answers on Philippine Monetary and Fiscal Issues, April 8, 2011

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