Pre-Closing "Dumps" Sent the Philippine PSEi 30 Tumbling Below the 6,500 Level

 

Pre-Closing "Dumps" Sent the Philippine PSEi 30 Tumbling Below the 6,500 Level

 

What the transition from pre-closing "Pumps" to "Dumps" mean 

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Pre-closing dumps have become the prominent feature of "the stock market with Philippine characteristics."  It represents a seeming shift in the price level "management" by unknown but influential participants of the PSE channeled via the principal equity bellwether, the PSEi 30. 

 

August 4's incredible "dump"—the largest since 2021—sent the PSEi 30 tumbling below the 6,500, a proverbial Maginot Line, a fiercely defended territory by the bulls. 

Yet, 73% of this week's 2.63% deficit came from Friday's 1.92% "dump." Pre-closing dumps occurred in three of the five trading sessions this week. 

 

As a result, in a risk OFF week where only 4 of the 19 national benchmarks declined, the Philippine PSEi 30 was Asia's laggard.  

 

Among the PSEi 30 members, the broadness and scale of the pre-closing selloff were incredible. 

SMC (9.01%), JGS (7.69%), AEV (4.97%), and MBT (4.43%) were among the heaviest last-minute losers. In turn, these issues suffered the most in weekly returns, i.e., 11.01%, 12.06%, 10.04%, and 4.7%, respectively.  

Twenty-four of the 30-member issues were down this week. The broader market sold off too: Decliners (531) led advancers (342) with a 189 margin. 

 

The top 10 brokers accounted for 60.68% of the weekly volume.  Last Friday, these creme de la creme intermediaries accounted for a remarkable 65.8% of the mainboard turnover.  

 

The daily mainboard volume (averaged weekly) jumped by 39.6% to Php 4.6 billion.   The cross-trades of some of the top brokers, which accounted for about 6.8% share, helped pad up the mainboard turnover.  

There's more. The twenty most traded issues accounted for 83.54% of the mainboard volume last Friday and averaged 83.04% for the week, which means morsels for the 266 listed firms at the PSE.  As such, the average number of issues traded daily has been drifting close to the March 2020 crash levels.

The above numbers magnify the concentration of activities to a few issues and brokers.

 

As emphasized repeatedly, the prevailing low-volume environment makes equities prone to selloffs.  

 

In any case, the expanding share of the top 10 brokers signifies evidence of the decreasing participation of the general public, the increasing risks of the industry, and the vulnerability of the PSE to excess volatility. 

 

Of course, Friday's selloff could generate an early week recoil that should help the index recover some of its lost ground.   The announcement of the Q2 GDP this week may help. Maybe not.  

 

And considering that the selloff occurred in the aftermath of the CPI report, it is unclear whether there is a relationship with the coming Q2 GDP broadcast. 

That said, the PSEi has been trading within a narrow range of 6,400 to 6,700.  

 

One can even interpret the 1-year PSEi 30’s chart harried by a bearish descending triangle pattern or a head-and-shoulder formation from the 3-year chart. 

 

Nevertheless, reclaiming its resistance requires considerable volume improvements, which alternatively means that the PSEi could plod to defend its support level absent these.  

 

From the "pumps," the remarkable shift to "dumps" underscore the deepening bear phase of the PSE and the PSEi 30 and its increasing fragility to excess volatility—as consequences of years of distortions from implicit price controls or interventions. 

 

As an old saw goes, all actions have consequences.  

 

The Hindenburg Omen Triggered; Will there be a US Stock Market Crash?

Although I began my analytical work on the financial markets as a “chartist”, I eventually moved on. 

There has been recent buzz about the reemergence of the so-called  “Hindenburg Omen”, which supposedly scared US stock markets last week.

The Hindenburg Omen, a technical indicator, if triggered supposedly portends of a stock market crash, thus was named after the “Hindenburg disaster” (see image above)

Writing at the stockcharts.com Chip Anderson says that the conditions of these crash indicator has been triggered: 

It happened in mid-April and it happend again on the last day of May.  The ominous sounding "Hindenburg Omen" signal has been given.  Here's the chart:

Here's the definition from our ChartSchool Glossary page:

"Hindenburg Omen: Created by James Miekka, the Hindenburg Omen warns of potential weakness in the stock market. There are three criteria to activate the omen. First, NYSE new highs and new lows must both be more than 2.8% of advances plus declines. Second, the NY Composite is above the level it was 50 days ago. Third, the number of new highs cannot be more than double the number of new lows. The activation period is good for 30 days. Once active, a sell signal is triggered when the McClellan Oscillator moves below zero and negated when the McClellan Oscillator moves back above zero."

So Friday's big drop triggered the Omen signal by causing $NYLOW:$NYTOT (the ratio of NYSE Lows to NYSE Total Stocks) to spike up above 2.8% (the red area graph above).

The Wikipedia.org has further conditions for such pattern to take place:

The traditional definition requires each condition to occur on the same day. Once the signal has occurred, it is valid for 30 days, and any additional signals given during the 30-day period should be ignored. During the 30 days, the signal is activated whenever the McClellan Oscillator is negative, but deactivated whenever it is positive.

Some users of the omen may choose to view the 30 day limit as "working days" and not "calendar days". This is reasonable as the global finance market works on a weekday (Monday to Friday) schedule—leaving about 100 hours where only limited sharemarket trading takes place. This only extends the omen's warning by an extra 10 days, a reasonable limit.

Having met the conditions, will the US stock market crash within 30 days?

Finally the odds for the pattern’s success:

From historical data, the probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [The Wall Street Journal 8/23/2010 article cited below states that accuracy is 25%, looking at period from 1985], and usually takes place within the next forty days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. Though the Omen does not have a 100% success rate, every NYSE crash since 1985 has been preceded by a Hindenburg Omen. Of the previous 25 confirmed signals only two (8%) have failed to predict at least mild (2.0% to 4.9%) declines.

Because of the specific and seemingly random nature of the Hindenburg Omen criteria, the phenomenon may be simply a case of overfitting. That is, by backtesting through a large data set with many different variables, correlations can be found that do not really have predictive significance. The Omen is at best an imperfect technical indicator that is a work in progress.

The last paragraph suggests that the accuracy of the Hindenburg Omen as crash forecasting tool may have been about data fitting. In short, this may not be reliable.

Anyway if the US stock markets should crash, I think it would more about the risks of a precipitate surge in the bond yields.

The Hindenburg Omen may function as a coincident indicator which reveals of the transition of the market’s sentiment as expressed in price trends and interpreted via specific technical indicators. 

But I wouldn't bet on a crash based merely on the Hindenburg Omen.

Philippine Phisix: From Death Cross to the Golden Cross

I have been validated!

Should We Chart Read Market Actions From QE 2.0?

``We can chart our future clearly and wisely only when we know the path which has led to the present." - Adlai E. Stevenson

Now we know that no trend moves in a linear fashion.

Yet we cannot be heavily reliant on chart actions to determine the “overbought or oversold” conditions from which to base our positions.

In any major trend (bear or bull cycles), overstretched markets or securities can last for an extended period.

Besides, chart actions greatly depend on patterns from past performances in the probabilistic assumption of a recurrence. The operating word is here probability.

But charting does NOT incorporate the prospective stimulus-response and action-reaction by the public to the ever fast evolving highly fluid environment nor does charting impute exactly similar conditionalities from which decisions had been shaped. This is despite some successful repetition of patterns.

For instance can charting say to what degree the markets will react to a sustained QE? The answer is NO.

And it is from such dimensions that I accurately debunked earlier claims by perma bears of the supposed repetition of the Great Depression, through the alleged similarities in the unfolding of chart patterns[1].

For most of the perma bears, whom have been influenced by some form of (political or economic or cultural) bias rather than sound analysis, they can characterized by the frequent use of post hoc fallacy and data mining to support their desired outcome.

This is why I also correctly disproved earlier notions of chart based bearish patterns which ALL failed to pan out.

I earlier wrote[2],

``They never seem to run out of materials to throw in, after the earlier “death cross” and the ERCI leading indicator, whose effects remain to be seen, now they point to the Hindenburg Omen as a reason to take flight.”

Now that the actions have been reversed and that all former bearish patterns have evaporated, chartists have been talking about the bullish “Golden cross”. Duh!

Yet even if one looks at the charts, the synchronous breakouts in global markets imply a tailwind effect or “momentum” in favour of continuity going forward. As charts have yet to signify distribution or exhaustion.

Also the assumption that charts impute all the necessary information is similar to the flawed premises of the Efficient Market Hypothesis (EMH) which ignores the role of the individual entrepreneurial activities that generate variable outcomes and the erroneous implication that all participants have the same homogenous ‘rational’ expectations[3].

And in learning from the recently departed Benoit Mandlebroit, the father of fractal geometry, on why not to trust charts, Mr. Mandlebroit wrote[4],

``And in the fun-house mirror of logic of markets, the chartists can at times be correct...But this is a confidence trick: Everybody knows that everyone else knows about the support points, so they place their bets accordingly. It beggars belief that vast sums can change hands on the basis of financial astrology. It may work at times, but it is not a foundation on which to build a global risk-management system.” (bold emphasis mine)

In other words, Mr. Mandlebroit shares the analysis disputing the homogeneity of rational expectations incorporated in charting, such that everyone employing the same pattern recognition techniques would render charting to be impractical and an undependable tool for investment or trade.

For me, chart patterns have higher probability of repetitions only when it treads on major trends.

Yet I find more value in identifying the stages of the trend or the cycle, where charts only serve as supplemental role or a guidepost for entry and exit points rather than for main reasons to anchor on a major investment or trading decision.

Hence, given the current market actions and fundamental based developments brought about by QE 2.0, I am unlikely to recommend any position that would fight the major trend.

Remember, QE 2.0 represents uncharted waters in modern central banking, unless we’d include Zimbabwe Gideon Gono’s approach as part of this.

So why use traditional or conventional tools to engage in something unprecedented?

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[1] See Seeing Patterns Where None Exist, February 17, 2010

[2] See The Importance of Peripheral Vision, August 23, 2010

[3] Shostak Frank, In Defense of Fundamental Analysis: A Critique of the Efficient Market Hypothesis

[4] Mandlebroit, Benoit B and Hudson Richard, The (Mis) Behaviour of Markets, Profile Books p .8

Example Of Chart Pattern Failure

As we always say chart patterns can’t be relied upon for that pivotal decision, most especially the short term ones.


The May-July S&P 500 Head and Shoulders pattern (blue curves) which had been used by the bears to call for a market crash appears to have been invalidated.

However, there is another longer term reverse Head and Shoulders (red curves) from which a break off the 950 neckline level would suggest of a vital upward thrust. Technically a break from the 950 should lead towards the 1,234 target. I doubt this to occur unless governments inflate extensively anew (second round stimulus?).

I have no opinion on where the US markets will be headed over the short or medium term. Although given the inflationary tendencies of the US government, it may seem that the recent lows could have likely served as the bottom or the floor, unless proven otherwise. But we're not saying its gonna be a bull market too.

Remember, inflation as a component of US equity returns, [see last week’s Worth Doing: Inflation Analytics Over Traditional Fundamentalism!] are likely to grow at a much faster clip than dividends or real capital returns.

And the US government has been practically inflating to support asset (stock and real estate) prices.