Monday, August 19, 2013

More Troubling Signs in the Charts of ASEAN Stock Markets; The Peso Carry Trade?

Two weeks back I showed of the troubling signs in the chart patterns of 3 of the 4 ASEAN equity markets[1].

This week the Thailand’s SET and the Phisix posted significant gains as well as a (somewhat) muted decline by the Indonesia’s benchmark.

But the weekly scores don’t tell of the real story. Extreme volatility has swamped ASEAN equity markets. The three ASEAN markets opened strong, only to see much of their gains or losses reduced by the end of the week.

Importantly the amplified volatility in the three ASEAN stocks led to a substantial deterioration in the chart patterns.


The Phisix has been bedecked by 3 “head and shoulder” patterns.

Stock market ‘bulls’ have mainly moored their sanguine readings by emphasizing on the bullish reverse head and shoulder pattern (green lines) formed during the last bear market strike in June.

But they have mostly been ignoring the older and larger 6 month toppish head and shoulder pattern (blue lines), which supposedly, as I previously pointed out, has a bigger chance of playing out.

This only shows that charts serve to fulfill the role of confirmation bias and as social talking points rather than objective assessment in the tradeoff of risks and rewards.

At the start of the week, some bulls prayed for the 200 day moving average (red trend line) to hold. And sure enough their supplications were answered. The Phisix stormed to a three day 3.8% advance. However the euphoria has abruptly been squelched by a huge drop in US stocks. The US influenced accrued Thursday and Friday losses in the Phisix chipped away half of the 3 day advances.

But this week’s botched advance has carved out another head and extended right shoulder (red lines). So does the new short term pattern offset or neutralize the earlier short term pattern? Does the new pattern reinforce the older and longer pattern?

One thing is sure, the motley of contradictory signals will reveal of the biases of analysts who, I expect, will continue to ignore signals that goes against their preferences.


Thailand’s SET seems to peculiarly share the same chart formation and even patterns with the Phsix, except that the toppish formation has been MORE pronounced.

Aside from the short (red) and mid-term (green) head and shoulder reversal pattern, the SET has now transcended into a supposedly bearish death cross where the 200 dma is above the 50 day dma (see blue oval).


Yet the death cross has likewise afflicted the Dow Jones Indonesia Stock Index (IDDOW).

Friday’s 3% decline has breached the short term support, which supposedly means that the momentum now runs in favor of the bears.

Yet I am not banking on charts.

As I previously said, the much advertised ‘strong’ fundamentals peddled by politicians and their lackeys will eventually be unmasked and reflected on charts. So far charts of these 3 major ASEAN benchmarks appear to already disagree with mainstream or consensus prognosis and expectations.

Yet if the market’s downshift deepens, then expect ‘fundamentals’ or future news to reflect on such downgrade.

As I previously wrote[2]
“Fundamentals” tend to flow along with the market, which is evidence of the reflexive actions of price signals and people’s actions. Boom today can easily be a recession tomorrow.
For me, for as long as the juggernaut of the bond vigilante prevails, it would be natural for these markets to respond to the fundamental changes being signaled by the markets.

And it would seem naïve to believe that history will mechanically repeat in the face of substantially changing conditions.

The Peso Carry Trade?

And one more thing, given the two year highs by yields of 10 year USTs, the spread between the Philippine and US counterparts have shrank to only 74.5 basis points or the smallest ever in history.

The Philippines has already bested not only ASEAN neighbors but even China and Australia in terms of treasury bond yields. 

While I previously discussed that such mispricing have been signs of a Philippine bond bubble[3], the incredibly low yield will not only reduce the incentives by foreigners to buy local assets or invest in the Philippines, such low yields may even induce foreigners, or even locals, to use the Philippine currency as funding currency for uncovered interest rate or currency carry trades[4].

Foreigners or even locals may borrow the Peso using such proceeds to buy into higher yielding ex-Peso assets. The internet now enables locals to access foreign markets. Borrowing Peso to fund a currency trade will only bloat on the swiftly growing loans in the banking system increasing credit risks as well as currency and interest rate risks. And by borrowing the Peso and converting them to foreign currency, the Peso carry will tend to temporarily weaken the local currency.

And given the prospects of reduced foreign buying from excessively low yields, this leaves locals representing a miniscule segment of the population as support for the domestic stock markets.

However the growth of local population participation on the domestic stock markets will hardly be significant in the same way how the domestic banking system has been unable to increase household participation due to excessive regulations.

Little of the above dynamics supports a return to a low interest rate dependent bullish backdrop. 

[4] Currency Carry (investment)

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