Phisix: Knocking At The Exit Gates of the Bear Market!

``A natural system has built-in redundancy. It manages and heals itself. The economic system is no exception…I argued against the idea that the economy is a "house of cards," susceptible to collapse as soon as a few cards are dislodged. We suggested that it's more like a beehive. The future of the hive does not depend on full employment for all the worker bees. In fact, an accident can put many bees out of action without compromising the hive as a whole.”-David Ranson, Economics as Metaphor, Wall Street Journal

Amidst the snowballing portrayal of gloom and doom, the Phisix once again appears to be playing our script to a tee.

Last week’s sizzling performance by the Phisix (up 2.85%) wasn’t much of the fanfare. That is, if we take into the account simply the nominal gains. Any market watcher could dismiss this rebound as simply a typical “dead cat’s bounce”.

However, unlike in the previous rallies, what deserves our attention is that the domestic benchmark appears to have reached a CRITICAL level enough to allow for a seismic shift AWAY from its present cycle.

As a reminder, like Mother Nature, financial markets always operate in cycles. This means that presently, the Phisix STILL is technically in a declining phase, otherwise known as a bear market. Segueing into the next cycle means undergoing a cycle shift to a market bottom.

Since market cycles constitute a process, a bottom can be characterized as a period of consolidation (sideways movement) and or incremental recovery. Again all these take time to unfold.

And a shift from the bottom to the next cycle means that as equilibrium has been attained where sellers have reached an optimal level or where they can’t drive down prices further (since they are equally met by buyers at a defined price level or range), investors will gradually develop confidence enough to start improving on pricing valuations.

Thus, from a bottom phase, once optimism starts to gain ground, we can expect the market to evolve into the advance or in the case of the Phisix the resumption of the secular bull market.

Since the Phisix appears to have reached the cusp of reestablishing a market bottom, the obverse side is that if it fails, this implies of the next round of declines or a series of losses to the level of testing the most recent lows.

However, considering that much of today’s rally have been VERY MUCH UNLIKE the past, this seems to present a fairly good chance for a successful breakaway!

Since our goal is to identify a market bottom going FORWARD, as discussed last week, I’ve drawn an outline of measures aimed at identifying the prospective reemergence of the cycle. Hence as previously enumerated:

1) mending MARKET INTERNALS,
2) improving TECHNICAL PICTURE,
3) reversal of FOREIGN FUND FLOWS,
4) possible SIGNS OF DIVERGENCES relative to US markets,
5) improving regional bourses performances and lastly
6), acceptable FUNDAMENTAL "story" for the investing public.

Market Internals Turns Significantly Positive

First we noted that one way to gauge a market bottom would be to assess investor sentiment through market internals as shown in Figure 6.

Figure 6: PSE: Advance-Decline Spread: Broad Based Improvement!

The Advance Decline Spread is a very significant market breadth indicator. It reveals whether rallies are based mainly from BLUE CHIP issues or importantly if the rallies are being reflected over the BROAD MARKET.

Since the start of the year the Phisix has had THREE bull market insurrections. In the three rallies we saw a weakening trend of the POSITIVE advance decline ratios whereas during the declines we saw LARGER negative ratios compared to the rallies, this gap signals the general bearishness of the marketplace. Effectively, we understand now WHY the previous rallies have failed. This seems not to be the case today.

Another, since the start of the year, the bandwith of advancing issues relative to declining issues had been shrinking (channel drawn by RED lines). This means that as the Phisix have declined, the selling pressures as reflected in the BROAD Market has been diminishing. The recent massive breakout on the POSITIVE side accentuated by the spikes (green circle) to the January highs lends credence to the strength of the recent rally!

A continuing rally accompanied by broad market gains ensures this shift away from the Bear Market Phase.

Next, we also noted that a transition to a bottom needs to be accompanied by improvement in the technical picture as shown in Figure 7.

Figure 7: stockcharts.com: Technical Picture and Divergences

The recent rally has brought the Phisix to touch the 50-day moving averages (blue line) similar to the rally in May (see green circles). Perched at 2,584, we need a breach from this level and also from the 2,650 level (minor resistance) to reinforce the confidence of a market bottom.

Of course, if the Phisix advances way beyond 2,900, the likelihood is that we have progressed into the next level, which should be a delight to local punters.

Of course, the local benchmark should also go beyond the variable 200 day moving average (red line) to likewise revalidate the return of the bullmarket.

Emerging Signs of “Uncoupling”; Ambiguous Regional Synchronicity

One of the MISSING puzzles during the former rallies had been SIGNS of DIVERGENCES, another variable which we identified as a potential support in the departure to the so-called “recoupling” thesis. Yes recoupling could happen to many markets, but we don’t share the view that it is going to be a “one size fits all” phenomenon (as argued above).

From the start of the year, most the bear market rallies seen in the Phisix had been accompanied by a corresponding rally in global bourses (near congruence in the blue line trends). This has been a continuing evidence of the high correlation among global equity markets.

Surprisingly, this week’s rallies apparently deviated from the norm and had been manifested over a much awaited development for us- a divergence or “decoupling”.

When the US markets yielded to substantial selling pressure by losing over 2% on Monday, the Phisix sympathized but only lost .5%. On Thursday, as the Dow Jones Industrials lost 1.7%, the Phisix became nonchalant enough to even generate slight gains! So in 3 occasions over the past two weeks, the Phisix seems to have virtually ignored the developments in the US markets.

Thus, Figure 7 exhibits what we’ve been rambling about: the relative DIVERGENCE from the lackluster environments of the US S&P 500 (above pane), Dow Asia ex Japan (pane below main window) and Emerging Market Indices (lowest pane) as denoted by the arrows.

Another minor factor has been regional recoveries. As identified last week in Phisix Best Week of the Year; Identifying A Market Bottom, The Phisix-Peso Tango, some potential bellwether candidates of a market bottom formation (based on charts in) have been in Vietnam, Singapore, Japan and China; although like the Phisix, these needs to be further corroborated by either reestablishing a series of higher lows or as mentioned above by EXTENDED consolidation.

Foreign Flows As Sufficient Support But Not A Necessary Condition

The only factor that seems to be out of our guideline at the moment is foreign fund inflows as shown in Figure 8.

Figure 8: PSE: Foreign Flows Remains On A Negative Bias

The recent spikes in the chart accounted for special block sales, thereby had been omitted from our analysis.

While the extent of the foreign selling has starkly been reduced, since the second bout of selling reappeared last October, as shown by the wedge formation (red lines), daily activities still manifests of continued but subdued net foreign selling.

This is understandable considering that the capital raising activities via forcible liquidation is still an ongoing process of deleveraging on a global scale.

However, it seems that the chunk of the foreign selling appears to have climaxed in Asia and maybe here too. According to a report from Reuters about 80% of the new money taken into Asia last year has already been redeemed.

This means that LOCALS and NOT foreign investors have spearheaded the recent rally. This also means that while foreign money can act as a sufficient pillar in support of the Phisix, it is NOT A NECESSARY CONDITION.

The underlying question is how enduring can local participants buoy the local markets; something which we think will be promptly addressed during the succeeding sessions.

Naturally, it would be a delight to see locals could come into the picture considering the present conditions. My suspicion is that most of these have been by institutions than from retail investors.

Moreover, locals have been the very important missing link into the domestic capital market development, so any signs of participation signify as a welcome development, aside from the relative proof that domestic factors can potentially outweigh external variables.

Fundamental Excuse: Reversing the “Rising Fuel=High Inflation=Lower Stocks” Causality

Finally, as for acceptable fundamentals for public consumption, the recent weakness in global energy prices has also been reflected in the streets through the rollbacks of local fuel prices.

Therefore, for publicity purposes, the popularly accepted oversimplified causality of “rising fuel=high inflation=lower stocks” has effectively been reversed lending to an impetus for the recent rally. Of course, the same cause-and-effect argument has not been validated in most of the world’s bourses debunking claims that “oil” has been the key variable responsible for the weakness in the financial markets.

Besides, much of the ignored factor is that rice and food prices (which accounts as the most critical variable for the inflation issue) have also began to scale back, even as the BSP continues to warn of the threat of rising inflation. This rhetoric of the BSP, I think, aims to communicate its policy actions (yes they are likely to increase rates again) which I believe is necessary to close the inflationary stimulus from negative real rates.

Again, a combination of variables which includes declining global commodity prices, the Philippine supply side responding to the market signals aside from political pressure induced policies aimed at bolstering investment and stimulus as discussed in Philippine Economy: The Micro Impact of Inflation, Bullish on the Peso are likely to lower statistical inflation index over the next few months.

Alternatively, the investments in agriculture should enhance the development in the rural areas, which should compliment the consumer driven “multiplier” of consumption and investment from continued strong flows of remittances despite current global conditions. Another, investments in the mining and other resource oriented industries plus infrastructure development should also cushion whatever decrease from external trade and from other macro economic linkages affected by the slowdown in the global economy.

So with 4 of the 6 metrics strongly suggesting of a continuation of the present momentum-technical considerations, solid market internals or broad based buying, emerging signs of continuing divergences and fundamental excuse of “lower inflation expectations” via lower global oil prices-the likelihood is that we may see the Phisix EXIT the bear market phase sooner rather than later.

As for additional signs from regional recovery has yet been to be confirmed while a positive reversal for foreign money flows into Philippine assets could likely be a bonus.

Overall, the next sessions should determine if we should start to rejoice over the end of the bear market….or have I spoken so soon again?