Phisix: Braving The Global Storm So Far

``Most financial professionals have strongly concluded that recent market action has completely disproved the decoupling theory that I have espoused. This is premature. It will take some time for the rest of the world to realize that what has been decoupled from the economic train is the caboose, not the engine”-Peter Schiff, The Price of Popularity

For the fourth consecutive week, the US equity markets have suffered its second episode of meltdown throes, where major US bellwethers have lost over 20%. True, many parts of the world have tracked the developments in the US, especially among industrialized economies. But unlike the first episode during the last quarter of 2008, where collapsing markets were ‘synchronized’, this time pockets of divergences have apparently emerged.

The Philippine Phisix, for instance, seems to have been shrugging off the turbulence, as the major bellwether accrued a 2.56% weekly advance amidst a raging four week squall to tally a marginal 2.53% year-to- date gain.

We have asserted that last year’s rout in the global market and the Phisix had been principally tied to the global debt deflation phenomenon called as the “forcible selling” or forced liquidations as described earlier than merely domestic “economy” related.

Nonetheless even as the world has been facing relentless pressure on the besieged US banking sector, which is further exacerbated by the banking crisis in developed Europe, locked in by the economic crisis in Emerging Europe, the appearance of diminishing degree of deleveraging based NET foreign liquidations seem to be partially gaining momentum in the Philippine Stock Exchange, see figure 2.

Figure 2: PSE: % Share of NET Foreign Trade

The red ellipse shows of the sharp drop in the share of foreign trade to total trade.

For the past four weeks, most of the sudden reduction of foreign trade is largely due to the expanded speculations over Meralco , a Manila based utility firm which maintains a legal stranglehold on electricity distribution over the National Capital Region (NCR).

Moreover, based on several market internal indicators as the advance-decline spread, see figure 3, we can take note of the improving breadth of the trading activities in the Philippine Stock Exchange (PSE) despite the violent gyrations in the overseas equity market.

Figure 3: PSE: Improving Advance-Decline Spread

In contrast to most of 2008, where the advance-decline spread hardly saw any material improvement, the collapse in late October of last year until the recent days have manifested a sizeable progress in the advance-decline spread as displayed by the red arrow.

Combined with the narrowing of foreign trade even before the Meralco sizzle, the improvement in the market breadth plus the 5 months of sideways trading makes it appear that the Phisix (see figure 4) has been drifting along a Bottoming phase of the market cycle.

Figure 4: Three Divergences: S&P 500, Phisix, Meralco

The Phisix, in green, is on a 5 month consolidation while the US S&P, light orange, has been on a steep plunge!!

But our guarded optimism has been partially substituted with alarm; the fantastic price actions in Meralco (black candle), where on the positive side has been providing the PSE with a semblance of “market leadership”, and risks being negated by a negative side, a formative bubble that risks overturning the recent improvements!