Phisix: Divergences Point to a Bullish Momentum

Chance is always powerful. Let your hook always be cast; in the pool where you least expect it, there will be fish.-Ovid

As pointed out above, the Philippine Phisix along with her ASEAN peers, has, so far, been major beneficiaries of the deepening accounts of global market divergences.

I would like to reiterate, we should NOT misconstrue divergences with DECOUPLING.

As I previously wrote[1],

Signs of decoupling will be manifested once the next crisis emerges. Yet given the depth or scale of today’s globalization or social interconnectedness which has not been limited to trade, labor, capital flows or to even monetary policies, I strongly doubt that this should transpire.

And since there have been little signs yet of intensified deterioration in the global economic and financial sphere, except for cyclical slowdown, part of which seems orchestrated[2], there hardly has been substantial evidence to read current events as prelude to the next recession or crisis. [Yes there will be a coming crisis, which will be far worse than 2008, yet I don’t think we have approached this eventuality yet. Not unless a black swan/fat tail occurs]

This gives me the confidence to say that divergences can or may be sustained for the time being.

And along with a significantly bullish reverse head and shoulders as shown earlier, this week’s rally has largely been broadmarket based.

As gains had been manifested on every sector, market breadth ostensibly recovered. The advance-decline spread turned positive, the number of trades improved and foreign trade remained nearly neutral (slight outflows-as shown below chart).

This implies that the recent rally has been fueled by local participants.

Again the mining index, after a two week reprieve, has regained market leadership.

The service and financial sector which registered gains above the Phisix also buoyed or contributed to the overall advances of the major local equity benchmark.

The service sector was led by PLDT which gained 8.63% for the week, while the financial sector was led by last week’s big losers BPI (+6.21%) and BDO (+5.98%).

Interestingly, BPI and BDO erased the losses from the anomalous last minute selling during Friday of the other week, June 17^th.

Add to this bullish backdrop was the rally in the Peso.

The correlationship between the Peso (blue line chart) and the Phisix (black candle) appears to be tight (red direction lines).

The underlying causal link of this relationship has been demand for the Peso assets which has partly been evidenced by foreign fund flows and monetary policy divergences and artificially low rates.

All these factors, particularly chart formation, rallying peso, improving market breadth, bullish local investors, appears to have converged to signify possibly as a significant tailwind in favor of the bulls.

Should the Phisix successfully encroach on the reverse head and shoulders resistance level at 4,318, then we could be looking at 4,900-5,000 by the yearend.

As caveat, this prognosis has been based on exegesis of current market conditions and on assumptions of future actions of the drivers of the marketplace—specifically politicians and central bankers. If my assumptions or an exogenous shock occurs, then my scenario could get upended.

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[1] See ASEAN’s Equity Divergence, Foreign Fund Flows and Politically Driven Markets June 5, 2011

[2] See Falling Markets, QE 3.0 and Propaganda, June 12, 2011