The Philippine PSEi 30’s Weekly Spike of 2.88%: an Oversold, Dead Cat’s Bounce?

 Never follow the crowd―Bernard Baruch 

The Philippine PSEi 30’s Weekly Spike of 2.88%: a Dead Cat’s Bounce

 

The consensus will attribute the GDP, inflation, and several earnings beats to the PSEi 30 weekly 2.88% spike.  In contrast, circumstantial evidence reveals that it was an organized and concentrated effort. 

 

I. PSEi 30 Outperformed Asia-Pacific 

 

Up 2.88% over the week, the principal benchmark of the Philippine equity, the PSEi 30, upstaged its regional peers.  Only Pakistan's Karachi 100’s 4.18% topped the PSEi.  

Figure 1 

 

Nonetheless, Asia-Pacific remains on a risk ON mood, with 15 of 19 national bourses closing higher, averaging a return of .8%.  South Asian benchmarks posted most of this week's gains, while ASEAN indices came second. (Figure 1) 

 

As previously noted, expectations of the Fed's "terminal rates" have fueled a frenzy in bidding up capital market assets.  Idiosyncratic factors in the domestic economy have been responsible for the asymmetric dispersion of gains. 

 

II. Risk ON: The Philippine Peso and Treasuries Rallied 

 

Nevertheless, it is necessary to analyze the market internals to discover if this week's "boom" has "legs." 

 

The Philippine peso rallied by .25%.  The USDPHP closed below 56 at 55.96 last Friday—a level last seen in August 2023.  The rallying peso dampens inflation expectations.   

Figure 2 

It was a mixed week for Philippine treasuries, with yields rising on BVAL T-bills and plunging on the notes (2-10) years.  Long-term yields also slipped. (Figure 2, upper window) 

 

These developments have led to a bull flattener—long-term rates falling faster than the short ones (compared to end-October).  It means the local treasury markets have partially shifted their concern from inflation to the coming rate cuts or "pause."  (Figure 2, lower graph) 

 

A bull flattener could help the stock market in the short run.  But declining rates and/or central bank rate cuts are usually in response to a substantially slowing economy or a recessionary environment.  And such an environment wouldn't be favorable to the stock market.  

 

III. PSEi 30: 64% of this Week’s Gains from End-Session Pumps; Economic Implications 

 

Beyond the headlines, one can interpret this week's outperformance by the PSEi 30 as an outcome of non-market forces.  Or, gains by the local benchmark had been forced and artificial.  

 

Figure 3 

This week's pre-closing pumps totaled about 110.39 points or 64% of the week's advance of 172.62 points or 2.88%.  Stunning. (Figure 3, upper graph) 

 

Since the stock market represents titles to capital, price pumps or dumps spur distortions or mispricing that send false signals to the economy.    

 

As such, the extended period of distortions results in the accumulation of misallocation of resources or a maladjusted (bubble) economy. 

 

It is also a bad sign for governance because it shows the biases of authorities in protecting vested interest groups rather than preserving the integrity of a market institution.   

 

Such developments also expose the inherent weakness of extant regulations, subjecting watchdogs to "regulatory capture," which means that if certain groups can "game" the market, why wouldn't they apply the same to their firms?   Doesn't this also reflect the surfacing of corporate aberrations, such as how and why one of the biggest telco firms, after it declared a 4-year "overbudget," got away clean?  

 

It also showcases the inflationary psychology expressed as the public's increasing high-time preference (or short-term orientation) of permitting these anomalous transactions—metastasizing these into a market norm. 

 

Yet, the growing popularity of top-down/centralization workaround of the financial economy erodes productivity and savings.  

 

So, the elites work on camouflaging these by inflating economic and financial statistics, "gaming" the financial markets, and imposing controls on "real" market prices (e.g., SRPs or price caps)—which at the day's end transforms into anti-competition moat.  

 

IV. More Circumstantial Evidence of Concentration and Organized Pumps: Volume of Top Brokers and Top Traded Issues 

 

In any case, this week's surge was, ironically, accompanied by volume stagnation.  The average daily mainboard volume (MBV) tanked by 14.33% to Php 3.075 billion--below the 2017 lows! (Figure 3, lowest chart)  

Figure 4 

 

An average of 61.3% of the daily MBV were from the top 10 brokers, where cross-trades from these accounted for about 12% (my estimates).  The decreasing volume has prompted a rise in the share of the top 10 brokers. (Figure 4, topmost chart) 

 

The top 3 largest market cap (Sy group of companies) accounted for an average of 29.9% of the MBV. The share of the three companies has been on a slo-mo uptrend since 2021. (Figure 4, middle window) 

 

The top 20 most actively traded issues represented had an average of 82.9% of the MBV.  It has the same uptrend dynamics as the top 3.  

 

Again, the slowing volume has resulted in the rise of trades in the elite group (mainly from the top 10 market cap issues). 

 

In the face of diminishing volume, the growing share of the elite brokers and top traded issues highlight the mounting concentration of transactional activities.   

 

V. Dead Cat’s Bounce: Divergent Advance-Decline Spread, Skewed Distribution of Market Cap Weights and Counteracting Role of Foreign Money 

 

Further, despite the headline spike, the advance-decline spread of the PSE was (believe it or not) a NEGATIVE 23 (416 advancers, 439 decliners, and 241 unchanged)!   

 

This data tells us that there was little diffusion into the broader market. (With that volume, why would it?) The data also suggest that retail was largely absent in the runup.  

Figure 5 

Members of the PSEi 30 benefited from last week's pump, with 22 of the 30 issues up.   But again, the top 10 market cap issues had the most gains this week.  (Figure 5, upper graph) 

 

Because of these, the skewed dissemination of gains only widened the differentials between the PSEi 30s largest market caps and the benchwarmers.   

 

As of November 10, the top 5 free float market cap issues command an incredible 47.2%, while the biggest 10 group holds 69.6% of the PSEi 30's free float weight distribution.  The PSEi 30s market cap share distribution mimics the "Power Law." (Figure 5, lowest chart) 

 

End-session pumps only highlight such organized and concentrated trades by the local version of China's "national team."  As a caveat, China's NT intervenes within the intraday session and barely at the closing bell.   

Figure 6 

 

Foreign money has typically counteracted these organized and coordinated pumps. (Figure 6, upper graph) 

 

But this week's net Php 86.9 million inflows suggest that foreign funds became their ephemeral ally.  

 

Unlike in the past, foreign flows represented non-resident funds.  In contemporary times, flows from resident-owned companies domiciled abroad or through some of their international partnerships could be categorized as "foreign."    

 

There you have it; last week's stock bidding ramp, backed by circumstantial evidence of concentrated and organized pumps in the face of decaying volume, barely brings about sustainable bullish signs. 

 

Seasonal factors may help, but unless there will be improvements in savings extrapolated into volume or market liquidity, this week's spike represents an oversold, dead cat's bounce.  (Figure 6, lowest graph) 

Another Dead Cat’s Bounce: Japan Equity Benchmarks Soar Nikkei 7.2%, Topix 8.02%!

It’s interesting to see how media selects their headlines so as to create maximum impact for viewership attraction…

Since Japan’s Topix outperformed the Nikkei today, it garnered the headline.

Last September 9 2015 when the Nikkei outperformed the Topix, the Nikkei 225 got the headline. 

The common denominator, " the biggest gain since October 2008" --as if this has any meaning at all.

So following last week’s three session 11.1% crash, bulls mounted another major rebellion to push Japanese stocks, led by the Topix and the Nikkei, to post today's titanic rally

So what spurred the rally? Well here is the Bloomberg’s account: (bold mine)

Stocks soared in Tokyo, with the Topix posting its biggest gain in more than seven years, as investors judged shares had been oversold and a report showing Japan’s economy shrank more than expected last quarter boosted the outlook for central bank stimulus.

The Topix surged 8 percent to 1,292.23 at the close in Tokyo, its best gain since October 2008, after plunging 13 percent last week. The Nikkei 225 Stock Average jumped 7.2 percent to 16,022.58 as the yen weakened for a second day. U.S. markets rebounded on Friday to halt the longest losing streak since September. Chinese mainland markets reopen Monday after a week long holiday during which global stocks fell into a bear market.

“Japan is massively oversold,” said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “Everyone is scrambling to get back in. Long-only investors are coming in along with retail and hedge funds. Plus, I would say there’s a lot of short covering going on. Also, U.S. shares rallied and we have China’s market back on today.” …

A report Monday showed Japan’s economy shrank 1.4 percent in the fourth quarter on an annualized basis, more than economists’ forecast for a 0.8 percent contraction.

So who knew: shrinking GDP equals monster rally! Bad news is good news! That’s aside from short covering and severely oversold conditions.

More…

BOJ Speculation

The yen capped its biggest two-week rally since 1998 on Friday, intensifying speculation the Bank of Japan may intervene to arrest gains that threaten to undermine almost three years of monetary stimulus. Finance Minister Taro Aso said Friday the government is watching market movements and will take any action necessary. Following a regular meeting with Abe, BOJ Governor Haruhiko Kuroda said he also would watch market moves closely.

So the simplified annotation: shrinking GDP PLUS expectations of BoJ rescue EQUALS monster rally!

Whoever said that stocks have been about G-R-O-W-T-H???!!!! One won't need a CFA for this!

Last September when the Nikkei staged its 7.7% rally I showed this chart…

Those red arrows were the huge 5%+ upside moves by the Nikkei.

Apparently, the concentration of the distribution of those huge upside moves occurred during 1990-1994 bear market. From 1990-4, almost all accounts of huge gains eventually saw the Nikkei lower than when such rallies were made.

Here is the contemporary version: Another congregation or clustering of major one day ups (as well as downs).

Even with today’s colossal 7.2% upside spike, the Nikkei remains below all the recent past major rebounds: the September 9 monster 7.7% rally, the January 22nd 5.88% rebound and the two day 4.8% NIRP bounce.

This entails that if history should serve as a guide, then today’s huge 7.2% rally may just be another run of the mill ferocious dead cat’s bounce...

...that should soon sputter.

Contagion Risks: China Export Growth Collapses, Other Signs of Economic Slowdown

I have been repeatedly saying that the contagion risks should be seen as clear and present danger in spite of the recent hope-based surge from global stock markets.

And in contrast to mainstream expectations, it appears that most recent China’s trade data, aside from other economic figures, reveals of an unfolding substantial deterioration.

From Bloomberg, (bold added)

China’s export growth collapsed and imports and new yuan loans trailed estimates in July, adding to signs the global economy is weakening and raising the odds the government will step up measures to support expansion.

Outbound shipments increased 1 percent from a year earlier and imports rose 4.7 percent, the customs bureau said today in Beijing. New local-currency lending was 540.1 billion yuan ($85 billion), the central bank said, lower than all 30 estimates in a Bloomberg News survey, after 919.8 billion yuan in June…

“Monetary policy easing has to be more aggressive in the remainder of the year,” said Liu Li-Gang, Hong Kong-based head of Greater China economics at Australia & New Zealand Banking Group Ltd. He said there’s a risk of a “hard landing” and the government may lower banks’ reserve requirements as soon as today…

Separate reports showed industrial output growth unexpectedly slowed last month to 9.2 percent from a year earlier and retail sales rose 13.1 percent, trailing analysts’ forecasts…

New yuan lending in July compared with the median estimate of 700 billion yuan in a Bloomberg survey. It was the lowest monthly figure since September 2011. Growth in M2, the broadest measure of money supply, was 13.9 percent last month, compared with the median forecast for a 13.8 percent gain.

The growth in July exports compared with the 8 percent median estimate in a Bloomberg News survey and 11.3 percent in June. Analysts estimated a 7 percent gain in imports after a 6.3 percent increase in June.

The trade surplus was $25.1 billion in July compared with $31.5 billion a year earlier. The median projection was $35.1 billion.

Excluding distortions caused by the timing of the Lunar New Year holiday, it was the worst export growth since 2009. The figures put China further at risk of missing its 10 percent goal of trade expansion for the year. China is still “confident” of achieving the target, Gao Hucheng, a vice commerce minister, said at a briefing today.

As one would note growth of exports, bank lending, industrial output and even retail sales have all exhibited marked declines.

Of course, hardly any mainstream news today has been without the promises of government rescue (“bad news is good news”), the above has been no different. This typifies the proof by assertion fallacy based on Lenin’s famous aphorism on propaganda “A lie told often enough becomes the truth”.

Chart from The Wilder View

Nevertheless with the growth rate of exports by major Asian exporters (China, South Korea and Taiwan) encroaching on the negative zone, we should expect a hefty slowdown in world trade to be transmitted to the global economy. This essentially elevates the risks of a global recession.

Recently China’s Shanghai Index has posted a modest rally. These may yet represent an oversold bounce or a dead cat’s bounce or whose sustainability has to be established.

Be careful out there.

Global Equity Markets: Bottom or Dead Cat’s Bounce?

Fear is the foundation of most governments; but it is so sordid and brutal a passion, and renders men in whose breasts it predominates so stupid and miserable, that Americans will not be likely to approve of any political institution which is founded on it.- John Adams

It’s nice to see global equity markets bounce off newly established lows.

The ASEAN-4, represented by the Philippines (PCOMP-yellow), Thailand (SET-green), Indonesia (JCI-orange) and Malaysia (FBMKLSE-red), once again demonstrating tight correlations of price actions even on a near term or 3 months basis.

Bottom or Dead Cat’s Bounce?

But has the recent lows been indicative of a bottom or has last week’s actions signified a dead cat’s bounce?

First of all, last week’s highly volatile actions in the global equity markets exhibited lucid conditions of boom bust cycles as the market’s principal drivers

This has been especially evident last Tuesday.

As US equity markets encroached on the bear market threshold of 20%, the announcement of the bailout of Belgium’s biggest bank Dexia SA by French and Belgian governments seemed to have spurred a dramatic 4% upside swing on the final hour of trading session where US major equity benchmarks closed significantly higher[1].

This signifies as the second bailout of Dexia SA.

At the height of the maelstrom in 2008, Dexia was the first among the many European banks to fall and subsequently became one of the major borrowers from the US Federal Reserve[2].

The possible implication of this is that the US central bank could be part of the consortium that determines how the bailout will be conducted.

Although current reports say that Drexia would be split into two banks, where one of the banks will hold troubled assets or serve as a ‘bad bank’[3]; there has been no mention of any participation of the US Federal Reserve yet. So this would signify as speculation on my part.

Like Greece, this serves as another example which reveals how bailout policies:

-usually don’t work,

-signify as inefficient approach in rectifying an imbalance,

-account as short term patches that only defers the problem,

-and function like a black hole where scarce economic resources are not only diverted, but drains on the productive sectors which ultimately enfeebles the overall system

Additionally, while credit margins for commodity markets have been serially squeezed, the CME Group, the biggest futures exchange, recently went to the opposite direction for financial securities, where the CME eased credit margins a whopping 33%[4].

This serves as another evidence where indirect market manipulation by policymakers has been biased towards bolstering the financial sector at the expense of the commodity markets.

The S&P 500 closed the week up by 2.12% while the Dow Jones Industrials and the Nasdaq were higher 1.74% and 2.65% respectively.

Technically speaking, the S&P remains below the 50-day and 200-day moving averages which points to the likelihood of a temporary bounce, until proven otherwise.

Yet the rest of the week has been distinguished by an environment directed towards more bailouts.

The Bank of England (BoE) reactivated her version of Quantitave Easing (QE) 2.0[5], whom will be expanding bond purchases to 275 billion pounds ($421 billion) from 200 billion over the next four months.

The BoE, through governor Mervyn King, has preempted European governments. Mr King claimed that this action has been made because they have lost faith in European governments’ ability to resolve the region’s debt crisis[6].

However, in doing so, Mr. King utilized fear anew to justify such interventions.

To quote BoE governor Mervyn King[7]

This is the most serious financial crisis we’ve seen, at least since the 1930s, if not ever. We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing

This essentially validates my theory that markets today are increasingly being massaged, not only through direct policies, but through communications management, or technically known as signaling channel[8], in order for the public to politically accommodate on such interventions.

Fear has served as an ever convenient tool to impose political controls over society.

And just hours after the BoE’s move, the European Central Bank (ECB) announced that they will be expanding her coverage of QE or asset purchasing program, by including ‘covered bonds’ or pooled securities backed by mortgages and public sector loans.[9] The ECB will buy 40 billion euros or $53 billion next month.

In addition, the ECB will give banks unlimited access to cash through January 2013 or loans in the duration of 12 and 13-months[10].

Also, speculations had been rife that ‘policy makers are working on plans to boost bank capital’.

European stocks have rallied off from a 2 week low as represented the STOX 50[11] or a blue chip index which covers 50 stocks from 12 Eurozone countries.

All these developments reveal of how global equities has been artificially buttressed by serial bailouts and policies of inflationism.

Also, interventionism, meant to prevent markets from reflecting the real values of financial securities, has massively skewed the pricing process that has led to severe volatility or sharp fluctuations.

Moreover, as further manifestation of distorted markets, price actions of so called risk assets have become tightly correlated when strains to the financial system emerges.

Finally price trends or the fate of asset prices are most likely to be determined by the prospective actions of policymakers. This makes governments the ultimate practitioners of insider trading—where governments manipulate markets to benefit certain segments of society.

With almost every major central banks expanding on their balance sheets today, most notably the very aggressive Swiss National Bank (SNB), see green line from Danske Bank chart[12], I would presume the US Federal Reserve’s participation will be a matter of political timing.

Blanc De L'oeil (White of the Eye)

It is important to note that announcement and implementation of QEs does NOT imply that markets would automatically or mechanically respond favorably. QE policies will likely be size-dependent and or highly sensitive to market expectations based on the timing, scale and duration of the program.

The efficacy on the marketplace from the current programs initiated by the BoE and the ECB which seem to be less in size than the previous measures, has yet to be established. Thus, the sustainability of the recent QE-led rebound can only be arrived at when chatters of bailouts diminishes—which implies that the market has began to discount the momentary adverse impacts of the underlying crisis.

Also, I am in the camp that sees that the US as unlikely to succumb to an economic recession. For example the chart above shows that the US Purchasing Managers Index PMI of New Orders and Employment remain in positive non-recession territories in spite of the recent slowdown[13]. And as I have been pointing out money supply growth in the US has been growing at a substantial pace[14] which poses as unlikely indicators of a looming recession.

But my stance would be conditional based on factors that may turn out to be shocks, such as further deterioration in the Eurozone or a China bubble meltdown.

In addition, I harbor a deep suspicion that markets are presently being used as fulcrum by politicians to secure their preferred political actions. This can be exemplified by BoE’s Mervyn King recent scare tactics, where such jawboning risks becoming a self-fulfilling prophesy.

And I would think that the US Federal Reserve chief Ben Bernanke may probably be discreetly wishing for more of market stress that would clear the way for him to impose his signature creed contribution to modern central banking—the modified helicopter option or the QE version 3.0.

It is important to note that US Banking and finance stocks appear to be highly dependent on Bernanke’s QE where the latter’s absence has led to declining share prices[15]. So aside from lethargic property markets, falling equity prices may affect the banking sector’s capital adequacy ratios that would prompt for further asset liquidations.

In addition, the interconnectedness of global banking system and the considerable exposure of US banks to crisis affected Eurozone banks leaves US banks highly vulnerable to a contagion[16].

These reasons would have been enough impetus for Mr. Bernanke to resort to QE 3.0. However, Mr. Bernanke appears to be have been inhibited by the recent political impasse with other political agents where his failure to incorporate QE 3.0 during the last FOMC meeting triggered a convulsion in the global financial markets[17]

This turns out to be one instance where supposed transparency of government policies meant to stabilize the markets morphed into an expectations failure because of politics. In short, like typical politicians, promises are meant to be broken.

Furthermore, resonant calls of greater odds of recession by his private sector allies could be part of this campaign to inculcate ‘fear’ in order to warrant political intervention through inflationism.

And I would add that the price action of gold has been indicative of the current state of limbo.

Despite the newly announced QEs, gold prices continues to fumble along which appears to deviate from the actions of the equity markets. Such variance puts emphasis on the aura of heightened uncertainty.

As for my position in the local equity markets, as stated last week

I would need to see the blanc de l'oeil or the French idiom for seeing ‘the white of their eyes’ before taking my shots.

---

[1] See Reported Bailout of Belgium’s Dexia Spurs a fantastic US Equity Market Comeback, October 5, 2011

[2] Telegraph.co.uk Belgian bank Dexia was biggest borrower from Federal Reserve discount window, March 31, 2011

[3] Bloomberg.com Dexia Board Meets as France, Belgium Tussle, October 8, 2011

[4] Zerohedge.com Soaring Financial Vol Leads CME To Announce A 33% Margin...Cut, October 4, 2011

[5] See Bank of England Activates QE 2.0, October 6 2011

[6] Bloomberg.com BOE Loses Faith in Europe, Announces Stimulus, October 7, 2011

[7] Telegraph.co.uk World facing worst financial crisis in history, Bank of England Governor says, October 9, 2011

[8] See War on Precious Metals: The Rationalization Process For QE 3.0, May 7, 2011

[9] See European Central Bank expands QE to include Covered Bonds October 6, 2011

[10] Bloomberg.com ECB Keeps Banks Afloat as Governments Act on Greek Risk, October 7, 2011

[11] Stoxx.com EURO STOXX 50

[12] Danske Bank Japan: BoJ can afford to be on hold for now October 7, 2011

[13] Dr. Ed’s Blog US Purchasing Managers Indexes, October 6, 2011

[14] See US in a Deflationary Environment, NOT! (In Charts) September 16, 2011

[15] See The US Banking Sector’s Dependence on Bernanke’s QEs, October 5, 2011

[16] See US Banks are Exposed to the Euro Debt Crisis, October 8, 2011

[17] See Bernanke Jilts Markets on Steroids, Suffers Violent Withdrawal Symptoms, September 22, 2011