Bullish Retail Investors Suggests of Signs of A Nearing Top?

``We just need to understand that no matter how much conviction we have, events may prove us wrong...After all, not long ago, the world believed all swans were white; then the world discovered Australia—and a black swan”- Jack Crooks, currency analyst

An online stockmarket forum http://www.tradercentral.ph/ held an assembly last Saturday at the PSE, where I was invited as one of the guest speakers on the topic of global market analysis, (Yes, It was my first speaking engagement and hopefully the last).

The amazing thing about the event was that the expected attendees had been somewhere about 100, when over 200 participants came. In other words, there was a flood of prospective, if not relatively “new” retail investors.

While the event was indeed a resounding success for the organizers, it sort of revealed of today’s market psychology where local retail investors have become also “bullish” with today’s market, who seem to be willing to “take the plunge”. (Of course, I’d like congratulate and thank the organizers, as well as Mr. Rapi Juvida, Jeff Siy, and Wilson Chong for the assisting me on my most challenging experience.)

When local retail investors become bullish, I become anxious. It is simply because the social dimensions of the market’s activities or the recent continuing gains have made the average investing public believe that returns from the financial markets have been easy to secure, notwithstanding, their apparent limited awareness of the risks prospects.

Noticeably too, their attention span have been intensely focused on the “short-term” trading aspects, particularly on the momentum side. This reminded me of children awed by magicians performing the sleight-of-hand tricks on stage.

Put bluntly, they are wont to see the plus side of the market, but gloss over the risks outlook. Besides, in the order of investors, retail investors are typically the last to enter.

Yes, arguably the low penetration level of local investors could translate to more upside for the market over the long run, as fundamentals such as the rising Peso coupled with higher yields may impel more local funds flow to the market. Let me repeat, over the long-term.

But, considering today’s palpable complacency, not only in the domestic arena, but as well as in the global arena, in the view of a prospective global economic growth slowdown led by the US, there could be meaningful bumps along the road. Yet, no one wants to hear of this.

Moreover, while it was my case to present the positive cyclicality of the Philippine stockmarket, I made a reminder that NO TREND goes in a straight line. And when countertrends do arise, they maybe as severe a headwind as to shakeout many investors and contemporaries, and likewise could prompt for a rethinking about the cycle.

The big guys have been sounding the alarm bells, PIMCO’s Paul McCulley (emphasis mine) in his latest outlook wrote, ``While the potential growth rate of GDP may have decreased over PIMCO’s secular horizon, the potential for a reflexive correction in GDP growth to outright recession has increased over PIMCO’s cyclical horizon. We sense volatility is creeping back into the business cycle, and the Federal Reserve’s “transparency” will be put to the test in the not-so-distant future.”

Or even the normally bullish BCA Research, thinks that a correction is due soon, see Figure 3.

Figure 3: BCA Research: Global Equities Are Due For Breather

According BCA Research (emphasis mine), ``The odds of a global equity market consolidation or correction are rising. Global equities have gained 16% since mid-June, and are now well above their May high. Stocks have benefited from a stream of positive economic surprises, including the sharp fall in oil prices and bond yields, among other things. It will be increasingly difficult to sustain this positive news flow in the short term. Moreover, this latest surge in stock prices is already comparable to the past three rally phases during the bull run that began in 2003, indicating that stocks are more vulnerable to any “bad” news. Bottom line: although market fundamentals on a 6-12 month horizon are still favorable, stocks look stretched from a short-term perspective.”

Two things of note: one, BCA comments of a world bull run that began in 2003, which prompts me to revert on the dimensions of what could have prompted a synchronous global bull run? Is it mainly Macroeconomics, Monetary Fund Flows or Domestic Reforms?

Secondly, I made my case on the Phisix stating that the “GIST of the gains of the Phisix has already been made” in my October 23 to 27^th edition, (see Should You Invest in the Phisix Today?), or in a different light, the Phisix could be near its cyclical top, eerily, almost in the same context of the above BCA’s analysis on the possibilities of a forthcoming correction.

In the said article, I mentioned that the Phisix could attempt to breach the 3,000 level by the yearend but in a larger probability could stay within its close ambit.

Yet, any further attempt to distance from the 3,000 mark by a significant margin, makes 2007 a likely candidate for an annual negative return following four years of consecutive gains. Remember, markets are basically mean reverting. 2007 or 2008 could be one of the odd-man out years in the ongoing advance cycle.

The prospects of a worldwide growth slowdown could be candidate for the trigger. And so as with the prospects of World Central banks to “continue raising interest rates” amidst a persistently high inflationary (consumer price inflation) environment, according to the latest G-20 outlook, or to even a combination of both (stagflation??)! There is also the risk outlook of rising protectionism.

Figure 4: Kitco.com: Collapsing Base metals signs of Shriveling Demand?

Last week, the base metal group led by DR. Copper, fell by a significant measure as shown in Figure 4. Over the past months, despite persistent calls for economic growth slowdown, base metals appear to have continually defied gravity to storm to new heights until last week.

Strangely too, the recent June rebound of base metals appears to have almost coincided with the rally in global equity markets. Does today’s correction imply or reflect on a genuine mark down in global demand? Does this represent merely a pause or a major inflection point? Will the decline in the base metals likewise lead to a cross-market liquidity squeeze? Or will it presage a corresponding decline in global equities?

As I’ve said in the past, the global financial markets have been sending asymmetric messages; the rallying bonds markets factors in a significant slowdown, while rising stockmarkets suggests of vibrant earnings and salutary economic outlook. With oil and metals down, the message appears tilted towards contracting demand.

In finale, let me repeat my October 23 outlook, ``Another not so bright scenario working against today’s high octane markets is that based on the charts, the Phisix has been quite overextended in terms of being overbought and is due bound for either a short-term pause or a natural corrective phase within its present momentum. I say present momentum with reference to the continuity of its interim uptrend, in contrast to a “major” corrective mode.

``Yet it is important to note that in bullmarkets, overbought conditions could go into the extremes, and vice versa for bearmarkets, which makes trading anticipation rather complex, if not abstruse.

``As mentioned above, patterns in markets are not something definite as to repeat exactly, but as Mark Twain puts it, it may “rhyme”. Prudent investing means measuring your potential gains against your potential losses and naturally, take on the appropriate action.”