Faltering Phisix Issues, Firming Broader Market

``Successful speculation requires staying on top of changes in industries and companies that either create new industries or improve on existing industries. The majority of your profits will come from these two … The shrewdest traders throughout history all adapted the skill of reactionary change, as the market constantly presents new and different opportunities.” -Bernard Baruch (1870-1965), Financer, Speculator Statesman and Presidential Adviser

In a typical bear market, broad market issues are expected to fall faster than Phisix heavyweights, but recently a peculiarity emerged; Phisix issues seem to be falling faster than the broad market.

Figure 6: PSE: Advance Minus Decline Spread: Narrowing Volatility Over the Broadmarket

Figure 6 from the PSE data reveals that the daily advancing issues - declining issues spread from June 1, 2007 until Friday’s close, suggests that the downside volatility coming from certain issues are NOT being shared by the rest of the market or by the broader market as seen by the narrowing range of advance decline spread (see arrows).

The largest series of frenzied selling pressures occurred in July and in October of 2007 where the spread has reached nearly 150 issues. After which, there had been a sporadic bout of sharp selling episode seen in January and in March but at much lower incidence and degree compared to the initial burst.

Whereas last week, despite the steep decline of the Phisix (-3.1%), the spread has only gone beyond 50 issues!

This means the selling breadth has been narrowing and has been undergoing selective and not a broad market phenomenon. In other words, the concentration of mass based selling has eased considerably.

This should be seen as a POSITIVE factor as most issues appear to be holding ground even amidst a weakening Phisix.

Ironically too, the weakest link appears to be issues held most by foreigners or Phisix composite issues.

Figure 7: stockcharts.com: PLDT A Drag to the Phisix?

A prime example would be Philippine Long Distance Telephone (PLDT).

The (Philippine Stock Exchange) PSE’s largest listed company is likewise listed in NYSE under PHI symbol is shown sizably underperforming the Phisix in Figure 7.

PLDT commands about 26.5% of the Phisix free float adjusted market cap index, which means a single fluctuation from the largest telecom company is enough to jolt the Phisix towards its direction. Unfortunately, where from 2003 PLDT led the Phisix to its recent high and even cushioned the market during the recent decline until February 2008, today, PLDT appears to have reversed its role and signify as a drag to the Phisix.

Said differently, the recent fall of the Phisix has been greatly influenced by the declining telecom giant. Could our officials be responsible for this too (see Why Forcible “Free Texting” Will Only Lead To Increased Poverty)?

Friday’s formidable decline in the US markets took a heavy toll on PLDT down by 7.23%. We don’t know if US markets will recover on Monday, as the PSE is on a holiday, but certainly some of PLDT’s decline in NYSE will likely be felt as the Phisix opens on Tuesday. This probably means that both the Phisix and PLDT could break from its recent low (support levels) and possibly carve out a new low near or at the new support levels of 2,400 and 2,600 respectively before bouncing back. Over the short term yes, some selling pressure remains but this should be seen as an opportunity than stampeding out of fear itself.

Again given the improving market breadth, this new low could represent mostly a knee jerk reaction towards the recent politicking aggravated by the adverse reactions in the US markets. If our leaders simply bark with no accompanying bites, then our market will learn how to discount these and eventually recover. However, if talks will come with attendant action, then portfolio rebalancing is thus required or rotating to issues less likely held by foreign money or less sensitive to political intervention.

Remember, under inflationary-negative real rates environment, holding cash or money market instruments or bonds are likely to present as a losing proposition considering that inflation rates are far more pernicious (concealed taxes) and punitive for savers. Your cash purchasing power loses value overtime! Aside, interest income recovers only a segment of your cash holdings.

The next likely option is to invest directly on tangible assets or equity issues with tangible assets or to invest in other forex reserve rich and current account surplus currencies or equities.