“Without education we are in a horrible and deadly danger of taking educated people seriously.” G.K. Chesterton (1874-1936), English author
One of the important sentiment indicators that I use in examining short term trends is measuring the actions of small retail investors.
This group comprise mostly the unsophisticated market participants, whose decisions are mostly swayed by emotions. Market tops (greed) and bottoms (panic) are frequently associated with aggressive actions undertaken by them.
Pigs Get Slaughtered
And there’s even this famous Wall Street axiom which alludes to them: “Bulls and Bears make money, but pigs get slaughtered”.
Pigs, according to Investopedia, are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due dlligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it's often from their losses that the bulls and bears reap their profits.
While I don’t have sufficient data to substantiate this phenomenon today, except that market breadth has considerably deteriorated, my sense is that the recent correction in the local markets may have incited some retail investor’s into panic selling.
Figure 1: Net Foreign Trade
Since the peak of the Phisix in October, foreign trade have been mixed (figure 1).
Last week foreign trade reported net buying, reversing almost half of the outflows seen from the previous week. This means that most of the selling pressure came from local investors. With the broad deterioration of the market’s breadth, this likely signals panic selling by retail investors.
And for whatever reasons which may have prompted for their actions I see this as an opportunity to accumulate rather than to flee.
Where weak hands dominate the activities, taking the contrarian stand would be the most prudent path. It seems almost the same case where we successfully called for “top” in the US bonds and the “bottom” in US stocks based on the activities of the Pigs.
Phisix (and ASEAN)-Global Market Divergences
We have to remember market actions have never been a one-way street, as buyers and sellers reacting to perpetually changing conditions, always struggle to tip the scale of balance in their favor.
I’d have to admit that over the short-term even global markets may take a reprieve. As to whether this would materially influence the actions in the local equity market, which appears to have foreshadowed the global trend, is something I can hardly predict.
And gold prices, which in my view, has functioned as a very important barometer of global equities, seems to have augured for this hiatus (see figure 1).
But the point is: the major drivers of global financial marketplace, particularly inflationism and globalization, remain intact which means likely a consolidation phase first, as a consequence to last year’s fiery run up, before the next leg up.
Figure 1: Growing Divergences In The Financial Marketplace?
One thing we can observe, so far, is that the Philippine Phisix, along with our Southeast Asian contemporaries, which has been one of the world’s best performers in 2010, appears to be diverging from the trends of the global equity markets.
This can be seen in based on the actions of the Dow Jones World Index (DJW) and Dow Jones Asia Ex-Japan (P2DOW), which means bourses of major economies have been sustaining the rise of global markets, via the DJW, aside from the other non BRIC emerging markets.
In fact, many of the today’s best performers have been last year’s laggards, which only implies of the rotational effects on equity asset prices as corollary from central banks inflationism.
Yet with most countries still showing advances more than those suffering from losses measured on a year to date basis, it’s hard to argue for bearishness unless current conditions dramatically degenerate.
Another source of a slight divergence appears to be in the tight correlation of the Phisix and the Philippine Peso (see figure 3)
Figure 3 Peso-Phisix Divergence?
Almost each time we see the Phisix fumble, the Peso follows. The chart demonstrates this relationship where a peak in the US dollar coincides with the bottom of the Phisix and vice versa.
This week we saw a sharp rally in the Peso even as the Phisix just eked out inconsequential gains. This implies that foreign investors buttressed Phisix as locals sold the market resulting to a broad based selloff.
My point is that if foreign investors increase their accumulations in the equity markets as the locals sell, we should see a consolidation (bottoming).
And where negative sentiment eases, and locals reverse from selling, we’d probably see a substantial recovery.
By then the Pigs will likely jump on the bandwagon.
 See US Markets: What Small Investors Fleeing Stocks Means August 23, 2011
 See Global Stock Market Update: Advancers Still Dominate, January 25, 2011