Survey On Local Sentiment, Stock Market Cycles Based on Psychology

``The fact of storytelling hints at a fundamental human unease, hints at human imperfection. Where there is perfection there is no story to tell.”- Ben Okri, Nigerian Poet and Novelist

The Christmas holiday with its incidental social gatherings is one great opportunity to evaluate investor sentiment.

While of course, these occasions do not represent the entire constellation of investors in the Philippine stockmarket, we try to interpret the information we obtained from the ground level with that manifested by market internals.

Noticeably there seems to be a widespread enthusiasm for stock market. This is in stark contrast to 2002, where talk of the stock market was an anathema to any crowd. Today even some housewives appear to dabble or talk inspiringly of the “wonders” of the industry.

In fact, the mere mention of stock market triggered lengthy discussions of its myriad scope; from developments in companies, micro economics and or politics as influences, and rumored activities by insiders aside from recent “successful” exploits.

The levels of participants were of varying degrees- from fledging investors to finance professionals-where most appear to fall into the average category; whose decision making are prompted for by broker-reports or through mainstream media or via social networks.

Here are some points we gathered from them:

1. Feasible business opportunities seem limited.

2. Rising Peso reduces the incentive to invest in the US dollar.

3. Interest rates are so low that the market appears to be the only option to generate satisfactory returns.

4. Stock market returns have been strong relative to other businesses or money market instruments and is strongly expected to remain robust.

5. Stock market returns are driven by developments in individual companies or the economy or politics.

However, a friend pointed out to me that in online forums, participants have not been as sanguine. Some were said to have shown signs of anxiety or fear emanating from the recent bouts of volatility.

Figure 2: Stock Market’s Psychological Cycles

While it maybe true that some fears may have been exhibited by some participants due to the recent volatility (rear view mirror syndrome), the fact that they remained active online means that they are hopeful and in search for an opiate.

To our experience, as signified by Figure 2, the average investors typically abdicate on the market when they capitulate or has given up hope (but with long positions) and thus abandoned the market. Such is the reason why no one seems interested about the markets in 2002, where the opportunities for maximizing returns were at its greatest.

Yet in every stock market cycle these psychological shifts transpire.

Figure 3: PSE: Market Internals Number of Trades and Number of Issues Traded

Figure 3 from the Philippine Stock Exchange shows on the left pane the daily number of trades and at the right pane the daily number of issues traded.

Since the Phisix cycle reversed in 2002, both activities accounted for an ascending trend.

For the daily number trades at the left pane, trading activities jumped to the max in April of 2007 and has been on a decline since the credit crisis erupted. Today, the daily number of trades has fallen to the mid 2006 levels.

Essentially, the number of trades reflects on the trading sentiment for traders or punters to positively churn their positions. The fall in the number of trades depict of short term traders/punters caught into buying ‘market tops’ and have morphed into long-only investors (again see figure 2) or retreated to the sidelines (less likely scenario). This appears to be a confirmation of the sentiment visible on the online forums.

The right pane shows of the number of issues traded. This indicator signifies general investor sentiment. When market participants generally turn optimistic the tendency is to position over to the broader market. In the past, we have made the 120 line as a yardstick demarcating optimism from pessimism.

Today, the number of issues traded remains at the peak albeit with signs of tapering (red arrow). This suggests that the investors generally remain optimistic buying into the broader market but has been trading somewhat less. Such developments again appear to validate our views from the ground on investors still optimistic but on a denial phase.

While we do expect some material reduction of activities in the face of externally instigated selling pressures over the interim, we do not expect these indicators to return to the 2003 or 2004 levels considering our view of the present cycle as a normal countertrend amidst a secular trend development.

In a way, some of the issues raised by the participants whom I listened to had valid footings such as the firming Peso and the low interest rates. Thereby, the recent activities exhibited by local investors in shoring up the Phisix, which resulted to a slim majority in 2007 at 50.22% of total Peso trade) could likely be a trend well into 2008 (in the assumption that foreign investors remain net sellers- which is very unlikely; foreign investors are likely to resume their net buying as US markets probably turn lower).