For the second week the Philippine benchmark rose by another big 1.38% to reach the 7,500 threshold. It’s the first weekly close at 7,500 since August 2015.
But as I have pointing out here, it’s not the headline numbers that matters. Instead, it is the content or how 7,500 have been shaped. In short, the paramount concern should be the quality rather than the just quantity.
This week AEV and AC continued to set new record highs (upper window). Again it’s not milestone heights that matters but the price actions showcased by the phenomenal blowoff or vertical blast offs dynamic.
AEV has carved out FOUR successive weeks of record setting action! AEV has returned by a shocking 19.86% in 4 weeks or an average of 4.96% a week! Talk about easy money huh!
Meanwhile, AC has also had a fantastically volatile move. But this has been much less than AEV. AC racked up 14.9% or a four week average of 3.72%. But AC rose only 3 out of the last 4 weeks. The huge weekly average return was a result of mainly the post election weekly gain of 12.65%. This was followed by a 4.11% dump. But then the loss was more offset by another 4.66% and this week’s 1.68% pump!
Stocks have been seen as not only bound for perpetual elevation, but more importantly they seem as destined for nirvana at the shortest possible time! All these yet the PSEi remain at 7,500.
And because the parabolic action the led to new records in 9 of the 30 issues been inadequate to power the past Phisix 7,500, it required MORE participation. So other issues seem as being primed for a rotational pump.
This week’s mega telco deal rationalized the permeation and intensification of PSEi’s vertical blowoff phenomenon. The telco’s were the main drivers of the service sector’s astounding 6.38% weekly returns! The service sector was responsible, which was seconded by the holding sector, for most the week’s 1.3% gains.
And the telco giants TEL and GLO skyrocketed by a phenomenal 13.67% and 7.4% over the week! Because of the pump, TEL jumped from eight spot to reclaim the fifth spot in the PSEi ranking. Three notches in a week!
TEL’s returns surpassed AC in just one week!
And the vertical pump has not been limited to the telco’s, aside from the ongoing no-look-back-ever run on AEV and AC, such has spilled over to the LTG group. LTG soared by an amazing 10.24% this week!
Again, NONE of the current features in anyway has resembled price movements in April 10, 2015’s landmark 8,127.48. Yet while current dynamic has similar traits with the runup towards May 2013 highs, as previously discussed, today’s activities appear to be flavored with sharper intensity, deepening hysteria and wanton desperation to reclaim April 2015 highs—with FORCE!
For a lot of stocks current actions are unprecedented.
But not for the PSEi and the sectoral performance.
Mark Twain tells us that history rhymes. So history may provide us clues of the blueprint of the recent blastoff moves.
The above chart illustrates on price actions of the Phisix (red), Banking (green) and Commercial-Industrial (red) during different eras, particularly today’s parabolic move, the tops of 2007-2008 and the 1996-1997.
The next chart exhibits on the other sectors, the holding sector (black), property (red) and services (blue) over the same time frames.
As caveat, understand that the composition of issues for the indicated benchmark indices may have or must have been different during those variant time dimensions. For instance, the PSEi has had three major changes in the benchmark calculation. That’s from price weighted variable multiplier method (fixed weights at base date) in 1987 to full market capitalization-weighted in 1989 to free float market cap in 2005. So recent changes may not have fully incorporated data from erstwhile pre-free float regimes. Here’s is the PSE’s policy on index management dated May 2011
Yet here are the numbers during blastoff phase of the above stated time periods.
In 1996-97, incremental gains morphed into a parabolic phase where the Phisix soared by 11.6% in the final two months (December to February) of the bullmarket. The property sector scored 13.7%, banks 16.78% and commercial industrial 10%. There was no holding and service sectors then.
In 2007-2008, in the almost two months, the Phisix went into an even more violent V-shape run that climaxed into a vertical blastoff phase. The bottom to peak returns as follows: Phisix 34.29%, Bank 25%, commercial industrial 22.7%, property 35.98%, holding 37.33% and services 40.14%
The two month mania eventually turned into a crash, panic and depression in over one year.
That’s even when the Philippines had no major fundamental problems!
The 2016 strain has been signified a longer 4 month PLUS version. It’s also been a V-shape run that presently has morphed into a totally vertical blastoff phase. Again such dynamic has been punctuated in the performances of many of the top 15 market cap issues. This means heavy punting and pumping activities have been funneled to or concentrated at the majority of the top 15 biggest market cap index sensitive issues.
As of Friday, PSEi scored 23.5% returns from January 21 trough. The banking sector 18.07%, commercial industrial 14.76%, property 35.6%, holding 32.35% and services 14.04%. Essentially the property sector has delivered the meat of the index gains. And the property sector’s outperformance has filtered into the parent holding firms.
These numbers or the distribution of gains tells also why the PSEi remains at 7,500. The vertical moves of the property and holding sector have essentially delivered the bulk of the weightlifting for the Phisix. The returns of the property and holding sector resonate on the 2007 activities.
On the other hand, actions by the underperformers mean that since they have participated less on the push, thus have signified a drag. The underperformance essentially echoes on 1997 activities.
Nonetheless the ongoing attempt to spread all vertical actions to the rest of the field. And today’s actions has represented the fusion of traits of both 1997 and 2007
So if history were to reveal of any significant lessons: it’s that blowoff activities will most likely end up very very very badly.
Blowoff activities are associated with end of the trend cycle phases whether a major one or a minor one. And considering the sheer ferocity of the recent pumps, this most likely point to a critical inflection stage.
Yet economics tell us why this is likely to happen.
Higher prices encourage sellers (law of supply: an increase in price results in an increase in quantity supplied). So as prices increase, more sellers can be expected to come on stream to take profits. Eventually, there will reach a price level point where sheer selling volume by sellers would outstrip the buyer’s (demand) capacity to buy*.
Remember, we are not talking about just incremental but abrupt price increases. So the faster the price increase, the more sellers are incited to sell.
Furthermore, even excluding valuation effects, the price level itself will serve as a significant barrier to sustained vertical price increases. That’s because as prices increase, this means that the buyer’s capacity will be reduced. Or the purchasing power of the currency, the peso, relative to stocks shrinks. Said differently, the higher the price levels, the lesser amount of stocks the peso can buy. This is known as the income effect.
So when price levels hit a critical mass where sellers (supply) start to overwhelm buyers (demand), that’s when prices first plateau, and then, begin to fall. And when sellers recognize of the price level overreach and would tolerate selling at lower prices than of the original intent, then the competition to sell emerges. Subsequently, such competition intensifies. Trend following actions take command. Momentum swings from gradual to accelerated selling as buyers dissipate. Mania transforms into frenzied selling spree or a panic. Sharp downside actions will happen until certain price levels where buyers reappear.
* all things being equal. Other factors have also been in play: perception of economic and political conditions, foreign participation, manipulation (see next message), access to credit (see next message) and etc…
Of course from the financial dimensions, there is the valuation effects—the inverse correlation between valuations and returns. High valuations are most likely to produce lesser returns. So as price rise higher to reflect on the valuations’ multiple expansions, the lesser the prospects of long term gains. This exactly signified the message of 1997, 2007 and 2013
As for valuations, the PSEi’s average PER as of Thursday was at 18.54 while the more accurate measure the market cap weighted PER was at a disturbing 24.39!
So trading activities has merely reflected on the shift of focus to short term oriented price chasing punts. In short, stock markets have been transformed into a gambling casino den.
Of course, the alternative explanation is that the Philippines have finally discovered the leprechaun’s fountain (instead of pot) of gold at the end of the rainbow. Or paradise has arrived, where law of economics (scarcity) will finally be suspended…permanently!
However, in paradise, abundance means money, prices, exchange and production simply ceases to exist!
No wonder the panic buying!
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