Asian Markets: Crossing the Bull Market Rubicon?

For many fundamental reasons discussed in our previous articles (such as in 2009: Asian Markets Could OUTPERFORM, or in Will “Divergences” Be A Theme for 2009?, or in What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis,) it has been our longstanding belief that Asian markets will likely 'decouple' or diverge and or outperform the rest of the world.

In addition, we further advanced the case that general technical indicators, market sentiment and market internals have been substantially improving in our domestic market as it had likewise been reflecting on the state of the regional performance (see Phisix: The Case For A Bull Run,) where the final obstacle to the full transition of the market cycle from a bottom to the advance phase requires the breach of the 200-day moving averages.

This week, the Philippine Phisix has been buoyed by the same regional tide and appears to have successfully hurdled the remaining last barrier.

So have Asian markets finally crossed the rubicon?

The Philippine Phisix has now popped above the milestone 200 day moving averages (red line).

Some have argued that excess capacity have plagued nations, whose primary economic activities cater to US consumers, will suffer more than the US due to "lack of domestic demand".

Well East Asian bourses, in contrast to such expectations have surged earlier than the rest.

Like Taiwan's Taiex

Singapore's STI

Hong Kong's Hang Seng

Even India's BSE index has leapt above the threshold mark.

We see the same actions in some of our closest neighbors.

Indonesia has also broken through

As well as Malaysia.
Albeit, Thailand has yet to achieve the same goal but is now at the testing zone. Although as of this writing Thailand appears to have joined the bandwagon.

Nonetheless, there are still some laggards...

As New Zealand's NZ50
The Australian All Ordinaries

And Japan's Nikkei 225.

But we shouldn't forget the leader of the pack: China's Shanghai index that has braved the negative tide and continues to post higher highs.

Yet the recent run has prompted many regional bellwethers to reach nearly oversold levels. Combined with seasonal factors perhaps there may be some weakness that may lie ahead.

Nonetheless they would seem like buying opportunities ahead of the immense liquidity driven market environment.

Seasonality in the Phisix and the Asian Stock Markets

``Intellectual clarity is the key to seeing the right things and doing the right things. It is a matter of knowing the shape of things even before the things take shape”. -Llewellyn H. Rockwell, Jr., Money and Our Future

Since we’ve covered gold’s seasonality factors I might as well make a short comment on the same variables from the standpoint of the emerging market stock markets, see figure 5.

Figure 5: US Global Investors: Emerging Market Monthly Performance

Since the fierce rally last March, many Emerging Market bourses have approached oversold conditions.

Together with the coming seasonal weakness, the risk over chasing momentum grows. As described by US Global Investors, ``Near-term caution may be in order given the outperformance of emerging market equities recently. Seasonality-wise, historical average returns from May to October tend to be weaker than those from November to April. The price performance pattern during the last 2001-2002 recession also indicates risks for a short-term correction.”

Of course considering the divergent performances of global bourses we’re not sure if the same dynamics would cover the Philippine Stock Exchange, although the third quarter has also been the usual weakest link (or our buying window).

Nonetheless the underperforming Philippine Phisix relative to its EM peers may consolidate than suffer from a big correction.

The important thing to ascertain is the whereabouts of the present phase of the market cycle since this would underpin both the medium to long term trend. We suspect that we are in the nascent stages of the bullmarket as discussed in the Phisix: The Case For A Bull Run.

Since the Phisix is now at the 2,100 mark, I expect the current momentum to bring it towards the 2,154 level its 200 day moving average which effectively serves as the “resistance level”, where a successful crossover should mean all systems go for a transition to a full pledged bullmarket.

Of course, no trend goes in a straight line which means the Phisix would encounter intermittent corrections possibly tracing out a similar performance as the MSCI EM in 2001 (chart at the right).

Figure 6: US Global Investors: Asia's Market Cycle Based on Price-to-Book Value

Anyway Figure 6 again from US Global Investors February 20^th alert also depicts of the price to book value cycles measured from trough to trough reflective of Asia bourses ex-Japan.

If history provides any guidance and if today’s rally validates our suspicion of our transitioning towards the next phase of the market cycle then perhaps this bullmarket cycle may last anywhere from 4-6 years.

Although the conditions of the past 35 years aside from the 2001 trough cycle are greatly different than today, the market’s response to the collective money printing efforts by global government may accelerate the boom but shorten the cycle- which probably implies a departure from the past cycles.

I am not sure but will certainly keep a close vigil.

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!