Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Man is free to choose not to be conscious, but not free to escape the penalty of unconsciousness: destruction. Man is the only living species that has the power to act as his own destroyer—and that is the way he has acted through most of his history. –Ayn Rand, The Objectivist Ethics

In this Issue:

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

-Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators

-7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

Note: I am not supposed to be writing today. However I changed my mind and opted instead to make an abridged version from my regular weekly ‘tomes’.

Phisix 6,900: 7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion; Manipulators Lose Significance

Phisix Round Trips Back to 6,900, The Eroding Significance of Market Manipulators

Wow. That was incredibly fast! Just like that, almost all of the other week’s furious low volume panic pumping and pushing of the index, evaporated like vapor.

This week’s 3.01% loss by the Phisix virtually erased the other week’s 3.19% advance. 94% of gains just went pfft!

The weekly losses would have been a lot larger, perhaps at 3.5% or more, but thanks to the index managers, Friday’s fantastic “marking the close” pump virtually expunged 80-85% of the day’s losses which shaved off the weekly loss to just 3.01%.

Friday’s “marking the close” could have most likely been designed to defend the 6,900 level which may have some technical significance.

Index managers are probably concerned that a breakdown of the 6,890 (green) support level would lead to a test of the August 24 low of 6,790. And a subsequent failure to hold 6,790 would mean dire straits for them.

Presently, the PSEi seem to be moving in a “rectangle” continuation pattern. Current actions appear to replicate the pre-August 24 crash conditions.

And since an approach towards 6,790 could mean a repeat of August 24, index managers pulled an orchestrated massive last minute move to keep a safe distance.

Said differently, an approach towards the 6,790 makes the PSEi highly vulnerable to another market crash, hence the marking the close.

As I have pointed out in the past, market crashes have hardly been isolated events. During the taper tantrum of 2013, there were two occurrences where the PSEi suffered 6%+ meltdowns. So index managers are doing their darn best to prevent this from happening.

Unfortunately, they fail to realize that their very actions have been part of the cause of the developing or progressing bursting phase of the domestic stock market bubble.

By destroying the stock market’s fundamental price discovery function, they have spawned massive ‘misalignment of asset prices’.

Even at 6,900, those ridiculously high PERs of PSEi composite members, which were all justified in the name of delusional G-R-O-W-T-H, have signified as manifestations of such deeply embedded maladjustments.

Yet changes have been happening at the margins. 

The ‘E’ in the PER or the ‘earnings’ were arrived in an environment where the USD-Php traded at a range of 44-45. The USD-PHP was quoted last Friday at 46.86. Since the ascendant US dollar implies of the tightening of systemic liquidity, then those earnings will likely come under strain. And a fall in earnings will even balloon PERs (at present price levels), therefore magnifying valuation excesses. The high PER curse.

And a risk aversion landscape will magnify on the unsustainability of speculative excesses.

The above also reveals that contra media’s frequent drivels; there is NO bargain to HUNT.

Moreover, given the downswing in the headline index, the PSEi, speculative mania has enveloped some of the third tier stocks. 

Explosive price actions can be seen in Ionics (ION), Minerales Industrias (MIC), Doubledragon (DD) and MEDCO Holdings (MED)! Their respective PERs (as of September 23) have similarly rocketed to the galaxy at 62.4, 91.1, 75.5 and -65.5!

This reminds me of the terminal phase of the 2007 mania where the “basura queen” was even featured in a TV documentary!

This exposes on how PSE has been transformed into a virtual casino! These desperation pumps also reveals of the terminal phase of the rapidly decaying Philippine stock market bubble boom cycle.

And naturally, since financial misalignment represents critical deviations on valuations based on claims on the stream of future cash flows, as well as from the market’s long term earnings trajectory, a major realignment of prices should be expected. In short, financial misalignment will impel for a market clearing process. And such process has already been in motion!

And considering the severity of mispricing, the market clearing phase will most likely entail several incidents of VIOLENT price actions! Yes, August 24 represents the appetizer.

So this only reveals that the more the manipulations, the greater the risk of violent price actions from the amplification of asset price misalignments!

Media will portray downside price actions as “volatility”, while project upside actions as “stability”. In other words, for media and their beloved bubble apologists, stock markets represent a ONE way street! In reality, ‘volatility’ represents severe price action in BOTH directions (“tending to fluctuate sharply and regularly” as defined by dictionary.com).

Also stock markets operate on cycles…an inconvenient truth that has to be vehemently denied by the establishment.

Curiously, from last week’s actions, manipulators seem to be significantly losing resources or ammunition for them to mount their previous maneuvers: the afternoon delight and panic buy day pumps. So they have been left with marking the close.

But marking the close wouldn’t be enough.

Aside from the U-turn or the roundtrip of the key equity index, signs that these manipulators have been losing access to support the index can be seen in the peso volume.

Last week, daily peso volume (averaged weekly) traded was at Php 7.154 billion.

Since June, the daily peso volume (averaged weekly) traded have ranged at Php 6.5 to Php 7.5 billion. This excludes the outliers like last week’s Php 18.8 billion (due to AEV’s special block sales) and two accounts of below Php 6 billion trades (one in August and another in September).

So the lack of peso volume in support of the bids at 7,000-7,100 caused sellers to find volume only at 6,900. Yet at Php 7 billion, volume remains thin...and has been thinning. And diminishing volume bolsters the odds and the risks of another big downside move. All it takes for this to happen would be another major headline event.

A dear friend had an anecdote last week of a client loudly protesting to a bank officer of the reduced value of an equity fund acquired from the same bank. While this may be hearsay, such incidences should be expected to swell.

A feedback mechanism will plague on stock market losses and the public’s exposure on equity. Deepening of losses will prompt for fund withdrawals. On the other hand, fund withdrawals will lead to further losses.

So indirect exposure on domestic equity markets through various funds, such as UITF, ETFs, mutual funds and insurance-fund hybrids, will likely see significant downsizing. And a reduction of fund exposure means lesser access to resources to pump up the markets.

Moreover if credit has been involved in the carving of the recent string of index record (false) highs, then margin calls or increase in collateral will be required to maintain such positions. Failure to add collateral will likely lead to liquidations, which should compound on the stock market’s woes.

Of course, losses will not just entail fund withdrawals and liquidations to satisfy credit requirements, they are likely to provoke increased instances of acrimonious finger pointing. Given what seems as hard selling techniques employed by some banks/financial institutions in the marketing their various funds, such may even lead to legal proceedings.

So a sustained market downturn will not only translate to losses, social frictions will likely follow.

All these tell us why manipulators and complicit media will likely become even more desperate in their attempts to support a fast fading mirage.

The noose on the false boom is tightening.

7 Reasons Why The Belief In A 2015 Santa Claus Rally Is A Delusion

For those afflicted by the hopium and have been pining or yearning for a Santa Claus rally, I have bad news. The bad news: It is NOT statistics or seasonality which drives market action. Rather it is the market’s risk appetite or risk aversion that ultimately determines the outcome. 

I made the same case in 2013 and had been validated: The last quarter delivered -4.88% for the PSEi in 2013. In 2014, the last quarter was also a negative (-).72 (see left).

General impressions can be fatal.

Seven reasons why risk aversion will likely dominate through the yearend and thereby frustrate any expectations of a Santa Claus rally.

First, serious technical chart damage.

The first Phisix chart above has already been a revelation of the massive technical damage from the recent selloff.

Add the following the analysis of MSCI Philippines from a point and figure chart perspective (right). The Gavekal team wrote, “EPHE is our first ETF showing a topping formation. EPHE was in a nice uptrend from 2011 to 2014. However, it has since broken through the bullish support line and that line looks like it has now become resistance. Unless EPHE can consolidate and push higher, EPHE is in the early stages of a downtrend.” (italics mine)

In other words, the odds for more downside seem greater than the odds for a recovery.

Moreover, it takes time for the market to heal as 2013 episode teaches us. That’s if there should be any recovery at all in the current cycle.

Second, as discussed above, volume in support of the bids at present levels continues to substantially attenuate. Unless there will be extensive improvements in peso volume, the risks is for volume to be found at significantly lower, rather than from upper, price levels of the index.

Lower volume implies, not only reduced liquidity, but heightened risk aversion as well.

Third, despite the wild pumps on SOME third tier issues, general market breadth remains tilted towards risk aversion!

For this week, all sectoral indices closed lower (left). This implies that the majors supporting these indices dragged these lower.

The property sector which led last week’s rally also spearheaded the reversal.

SMPH’s previous scintillating record breaking 14.03% run prompted for a near complete reversal with an -11.23% loss for this week. The service sector placed second where both telecom titans had been hammered (TEL -2.99% and GLO -5.85%) along with the crash in port operator giant ICT -9.31%.

When the PSEi rallied 3.19% the other week, advancers led decliners 19 against 9 with 2 unchanged issues. This week, decliners led advancers on a 21-7 differential with 2 unchanged issues. In short, selling have remained the dominant sentiment.

Sentiment has radically been altered even at the broad markets. Decliners led advancers with an aggregate margin of 128, a U-turn from last week’s 164 margin in favor of advancers.

From the start of the year going to record highs, the PSE universe has already been diverging from the headline index. Record highs were made via a rotational pump on 10 out of the top 15 issues. The pseudo record highs came about with about half of the PSE issues in bear markets!

Current developments have even widened the lead of decliners relative to advancers on a weekly basis. From the record April 10 high through last Friday, there had been 18 weeks were losers dominated as against 6 weeks in favor of gainers with one week unchanged. The accrued advance decline spread during the past 25 weeks is NEGATIVE 1,807! 

Bear markets have dominated the PSEi index. 16 issues are in bear markets. 5 of the top 15 are in bear markets. 5 issues seem to be approaching the bear market zone. Overall, bears have ruled the PSEi. The PSEi has been kept afloat through selective pumps on a narrowing window of big cap issues.

Previous divergent forces have been converging. Or conflicting internal forces are being resolved into a single force.

Risk aversion has clearly been in charge.

Fourth, overall market liquidity has been shrinking.

Low volume and other stock market trading indicators have been declining.

And it’s not just stock markets, even Philippine bonds have been continually exposing signs of a flattening yield curve.

Despite persistent pumps to steepen the curve, this week through pumps on the 1, 3 and 6 months bills, domestic bond markets have remained porous as to reveal of built-in imbalances. 

The spread of the major benchmark 2 year and 10 year (ADB’s favorite) has been narrowing significantly, again.

This implies of a tightening of net interest margins for banks which also suggests of reduced credit activities. Consequently these should translate to diminished G-R-O-W-T-H (especially for an economy hooked on credit)!

Perhaps next week someone will attempt to widen the spread.

This brings us to the fifth factor, receding liquidity entails that the headlines will unlikely be supportive of a major upside move

Less rosy headlines in the face of foundering markets will hardly restore C-O-N-F-I-D-E-N-C-E or the animal spirits. Journalistic spin will unlikely mask all the deteriorating data.

Sixth, a significant domestic stock market rally will unlikely occur if Asian currencies continue to get clobbered.

Whatever big gains by the Malaysian ringgit last week had been more than entirely erased. The USD ringgit soared by a shocking 4.5%!

The Indonesian rupiah remains under pressure. The USD rupiah soared by 2.2%! The Indonesian central bank has reportedly been slated to unveil new measures in support of the rupiah. This won’t be the first time. They have recently imposed capital or forex controls which evidently didn’t work.

Taiwan’s central bank also panicked. The central bank cut rate for the first time since 2009 as exports faltered. The result was for the USD-Taiwan dollar to surge by 1.84%. The Korean won and Singapore dollar had also been battered. [As a side note Norway’s central bank also panicked, they cut rates to a record low]

Official rates saw the USD PHP (peso) climb by 1% to 46.86. Like the Phisix, USD-PHP losses had been almost entirely reversed.

Seventh, a significant domestic stock market rally will unlikely occur if global stocks will remain under selling pressure.

Surging USD or tumbling Asian currencies have been transmitted into stock market pricing. It’s has not just been the Phisix but most of Asian have been bleeding. (right)

In an apparent realization of the faux pas from not having to raise rates, US Federal Reserve Janet Yellen backpedaled to speak of a rate hike at the end of the year (bold mine): Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter. But if the economy surprises us, our judgments about appropriate monetary policy will change.

So once again Ms Yellen straddles the fence by saying one thing but also suggesting another.

US stocks have been under pressure. Apparently the US Fed didn’t expect this from its recent decision to stay the course. So the half spirited volte face by Ms. Yellen…tacitly premised in the hope to rekindle the stock market animal spirits.

Unfortunately instead of just energy, biotechs (left) and small caps (right) have been smoked lately. 

And not only that, Ms Yellen now continues to mention negative rates: (bold mine) “As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace. For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC's mandate, to promote maximum employment

It is as if the Fed has been conditioning the public to a prospective negative interest rate regime.

All these mixed or confused messages have been increasing uncertainty on the marketplace, thereby aggravating on the diminishing US dollar liquidity.

And it’s not just the US, despite Friday’s monster rally, the German Dax has now fallen into the clasps of the bear market.

Hence, if global stocks remain under pressure then the belief that the PSEi can decouple should represent a hallucination, balderdash, if not propaganda.

Unless all or most of the above issues will be resolved, a Santa Claus rally will hardly occur. Instead, all the above suggest for us to batten down the hatches.

A belief in a Santa Claus rally under the current conditions should imply “a fool and his money are soon parted”.

Caveat emptor.