``The game is always changing and evolving, and it pays to pay attention to new theories. The bottom line is to always be open-minded, to try and improve the way you do things." -Brian Cashman (GM, NY Yankees)
I have spoken to around three brokers over the week and found all of them overly bullish. I guess that is the nature of brokers, to be bullish because selling stocks or inducing clients to trade would have to come from optimistic expectations.
What drives their bullishness today is no less than the behavior of the Phisix, which has, as pointed out previously, tracked closely the movements of the US benchmarks as with most of global equity benchmarks. The Phisix like their US counterparts seems to be like Bob Dylan’s “knocking on heaven’s door”.
Figure 3: Phisix: Knockin’ on Heaven’s Door?
In theory, excessive bullishness shown by brokers possibly means that most clients who have been egged to buy or enter the market have already done so, leaving little room for more buying activities that could lift the market to higher levels. In short, it is a crowded traded. This, in essence, suggests that inordinate bullishness translates to eventual market tops.
But who has lifted up the Phisix lately? Obviously based on last week’s data foreign money had been a critical factor with locals apparently having reduced their interest over speculative activities over the broad market. Could it be that the local investors have abided by PSE’s admonitions and instead joined their foreign counterparts in accumulating blue chip issues too? Hmmm... Or is there a possible something else brewing at hand?
Of course with the momentum going in one’s favor, would one even care to listen to what may derail it? As we have previously noted, the average investors normally extrapolate the immediate past as the likely path of the future.
I’d like to point out to you that the ongoing activities in the US Treasuries market have not been singing hallelujahs as the consensus have it. In fact, if one looks at the present activities, the rapid decline of the 10 year bond yields point towards, expectations by bond investors of an ‘accelerated’ mark down in the US economic growth cycle and inflation expectations as shown in figure 4.
Figure 4: Stockcharts.com: Bond Yields Suggests Big Slowdown Ahead
While our local brokers have been outright perky, believing that the Philippine markets could perhaps be insulated from external events, we gladly point out that key US equity benchmarks have their own version of “Knockin’ on Heaven’s Door” probably by Avril Lavigne...
Figure 5: Stockcharts.com: Knockin’ on Heavens Door or Facing Hell?
...or if not Ozzy Ozborn’s Facing Hell? As you can see in Figure 5, both key US equity benchmarks have reached critical resistance levels following the recent run-up. Yet, following a touch of these critical highs we have seen them fall back to support levels.
On the technical picture, we find mixed signals with a bias (ok, my bias) towards the downside. Retracing from last week’s record highs draws a bearish “double top” formation, accompanied by the still intact bearish “rising wedge” formation. We also have the Moving Averages Convergence Divergence (MACD) indicators, shown in the lower window, as indicating an overbought position too.
If these US equity benchmarks successfully breaks above the defined resistance levels then I expect the Phisix to likewise sustain its rise and equally break May’s high. Then one should reposition into the market, as global markets are likely to position for a Christmas rally in spite of an economic global downturn. Anyway, world’s endless stream of money has to go somewhere, right?
On the other hand, if the prospective slowdown in the US finally comes home to roost for US equity investors, then expect some pretty big correction, from whence we stand. And so forth with global indices and the Phisix.
So it’s your choice, Bob Dylan or Ozzy Ozborn?
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