A Bird At Hand is Worth Two in The Bush

The recent reemergence of volatility has interposed the question on whether this has simply been a respite or a much needed correction for a continued upside move or a pivotal turnaround or reversal. Since the Philippine markets have been largely influenced by the actions in US equities we then would take a clue on the latter’s prospects.

Mr. Adam Lass, Senior Market Analyst, WaveStrength Options Weekly chronicles how the Dow Jones behaved when it dropped 5% in the past.

Quoting Mr. Lass (emphasis mine), ``The largest episodic loss was March-October 2002’s 32.57%, while the smallest was August-October 2005’s 5.25%. The average for all 15 retracements was 15.01%, four were less than 10%, eight were between 10% and 20%, and three were more than 20%.

``So what does this tell us about where the market could be headed next? During the current drop, the Dow has fallen as much as 5.75%. Of the past 15 similar drops, only one time during the August-October 2005 drop, did losses stop at this level.

``Time-wise, the average duration of a fall is 2.53 months and the average latency period from the end of one drop to the beginning of the next is 5.4 months.

In other words, the probability looks tilted towards a continuity of heightened volatility. Only 6.67% (1/15) of the time did the correction stop at this level, while the average may see a decline of about 15%. For as long as the Phisix gets its vitality from the actions of the US markets, we could probably encounter a similar degree of market activity where the risk reward trade off seems to favor more of the downside.

Whether today’s decline is fundamentally supported or not, developments have yet to clear itself, meaning greater uncertainties tend to produce higher volatilities.

Where the path of least resistance is obviously on a downside move, except for US treasuries, a large swathe of the asset classes remain under pressure, surprisingly including the US dollar (I mean the US dollar index) and gold. I think, as the Phisix and the other Philippine asset classes remains under pressure, the Peso will reflect similar circumstances [My hunch is that the Peso could rally to around 51 before reassuming its uptrend].

It pays to probably be prudent by lightening up or underweighting one’s portfolio. And take OVERSOLD opportunities in the market to either load up and trade over the short-term or accumulate for the longer period, as we remain bullish over the longer trend cycle BARRING a global depression. To quote the oracle in Aesop ``a bird at hand is worth two in the bush”.