“‘The more it changes, the more it’s the same thing.” I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, “the more it changes.” The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound— and a cliché’s only excuse, I suppose, is that it is sound—then the stock market will continue to be essentially what it always was in the past—a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one.”—Benjamin Graham,Stock Market Warning: Danger Ahead! (1960)
In this issue
Phisix 7,900: Overvalued, Overbought, Euphoric and the “Mark on Chaos”
-Severely Overbought and Emerging Signals of Buying Fatigue
-Inefficient Markets and the "Mark on Chaos"
-Circa 2017: The PSE’s Worship of Stock Market Bubbles!
Phisix 7,900: Overvalued, Overbought, Euphoric and the “Mark on Chaos”
Severely Overbought and Emerging Signals of Buying Fatigue
Like it or not, even from the viewpoint of chart technicalities, the Phisix has ridiculously been overbought.
Overbought conditions represent a symptom of a set of previous frantic buying actions.
Wouldn’t upside price spirals, in near vertical mode, lead to such conditions?
Even classroom physics would say that to push an object to a steeper slope would require a “greatest amount of force”. Thus, those vertical price actions have extrapolated to a massive deployment of force or energy to attain current standings. And to extend the logic further, to sustain the current upside or even just to maintain the present levels would require even greater force than the previous. That’s because previous buyers would be tempted to sell if the quantity of ‘greater fools’ levels off or even shrink. And because emotions govern and are deeply embedded in the market today, as manifested by the sharpness of slopes in price trends, greed can easily transition to fear. Or once the buying fatigue sets in, profit taking can morph into a stampede.
Again, a GREATER amount of force or energy and resources from greater fools would is REQUIRED to sustain the current steep uptrend. Otherwise, the momentum is at risk from a disorderly reversion to the mean.
The thing is here is, this has not signified the first time. The same patterns emerged since 2013 only to repeat at higher levels as shown in the aborted runups in 2015 and 2016.
So this time MUST be different!
Because of this week’s 1.35% decline which was mostly based on Friday’s -1.03%, the various indicators—momentum (RSI, MACD), volatility (Bollinger’s Band) and oscillator (Commodity Channel Index) have unanimously come off the overstretched buying conditions.
The divergence between the price trends and such various indicators (RSI, MACD and CCI) exhibits a snowballing of buyer’s fatigue. The same crucial divergences appeared in the 2015 and 2016 episodes, which eventually presaged a meltdown.
Also, the rapidly widening spread between the 50-day and 200-day moving averages has likewise showcased the intense bidding activities of the recent past. Yet, further downsides or a slowdown in such actions will lead to the narrowing of the trend following indicator.
Furthermore, the current runup has extended overbought conditions to resonate with the previous MAJOR peaks (see red ovals in the three indicators)
Worse, all three (2015, 2016 and 2017, including the 2013 7,400 version) runups to 8,000 suffer from the same plague: a bearish rising wedge formation (orange channels)!
Inefficient Markets and the “Mark on Chaos”
Though I started out as a chartist, I am no fan of charts. The simple reason is that the focus of charts has been on PAST actions. And from past actions, derived indicators are equivalent to econometrics used in attempting to predict the future. These indicators place an intellectual hat, predicated on mathematical formalism, anchored on several sets of quantitative assumptions. Yet the simple premise is that past performance does not guarantee future outcomes.
Why? Because human actions are variable, dynamic and ever changing dependent on conditions presented, which could hardly be quantified. Furthermore, conditions which influence actions are unique.
Nevertheless, since charts signify as the most popular tool, it is useful in the sense to understand the popular thinking.
And from here, the current chart reveals the same pattern of actions. From the pattern, the implicit motto is ‘try and try until you die’ (or succeed)…
Unfortunately, feel good unsustainable and uneconomic actions must always trump the lessons of history. And cycles are founded on such reiterative actions.
And because prices are the only thing that matters, chart reading seem to be pillared by the Efficient Market Hypothesis (EMH) – a theory that presupposes that prices incorporate all available and relevant information. Although of course, because markets are assumed to be efficient, EMH says timing hardly helps in adding value to one’s portfolio.
Such would be in contrast to the preaching of the chartists where the timing of trades serves as the paramount objective.
I cannot conceive of an efficient market when I see this…
People hardly realized of the earthshaking actions that occurred last Friday, June 16.
It was more than just a dump at the closing bell which comprised 28% of the day’s output, but the stunning chaos from the bedlam of the frantic pumps and dumps from the widespread ‘mark on close’ orders that led to the day and the week’s aggregate activities.
Some numbers based on June 16. Friday’s Phisix loss of 1.03% contributed to 76% of the week’s decline.Friday’s overall dump accounted for 21% for the week’s output. That’s just the appetizer.
The table on the upper left illustrates the graveness of the ongoing process of systematic price perversion in the PSE.
It just so happened that the dumps were on a bigger scale to more than neutralize the end session pumps for the day’s output to turn significantly lower. Otherwise, had those dumps been restrained or had not transpired, losses would have been substantially erased if not reversed…all in a flash!
Regardless of the outcome seen in the headline index, the impact of the end session pumps and dumps were pivotal for many individual stocks.
Take for instance the following:
SM’s -1.59% dump constituted 51% of the day’s loss and 55% of the week’s 2.88% decline!
AEV’s -2.0% dump constituted 67% of the day’s loss and 86% of the week’s 2.32% decline!
AEV’s -1.68% dump constituted 121% of the day’s loss and 81% of the week’s 2.07% decline!
JGS’s 1.02% pump contributed 47.44% to the alleviation of the day’s -1.13% loss and to the 42.66% on the week’s -1.37% deficit!
SECB’s 1.18% pump contributed 65.19% to the day’s +.63% gain and 81.4% of the week’s +.27% advance!
TEL’s 1.33% pump contributed 56.12% to the alleviation of the day’s -1.04% loss and 57% of the week’s 1.1% advance!
Shocking numbers!
Essentially, Friday’s 6-minute transition period - from the regular session to the closing bell - determined MOST of the daily and the weekly performance of the said stocks and partly the Phisix!
With such a system, the five-day trading session would not be required at all. The week’s trading can be cut into just a SINGLE day!
And with most of the trading volume occurring during the runoff period, the one day of the regular trading session can be pruned to just an hour!
That’s the Philippine stock market for you.
I will repeat: falsification of prices leads to the accumulation of imbalances and to financial instability.
As proof, eleven of the week’s 30 index composite issues or 37% had price changes of 2% and above which are signs of mounting instability from speculative excess and rampant manipulations
There will be a huge price to pay for such abuses.
Circa 2017: The PSE’s Worship of Stock Market Bubbles!
Here’s more.
For the first time since July 15 of 2016, under a new president, the PSE celebrated the closing at 8,000 lastJune 5, 2017.
In 2015, the PSE glorified the 3-month breakaway record run from 7,400 to 8,127.24 EIGHTEEN (18) times!!
In 2016, even when the PSEi was testing the highs of 2015, the PSE regaled on the 8,000 level FOUR (4) times!!
With no record yet, for this cycle, the PSE has mimicked on the ravings of 2016 to signal the establishment’s euphoria!
Again the difference: in 2015, the PSE applauded the PSEi’s race to new records. In 2016 and today, the PSE extols a non-accomplishment.
The similarities: the imputation of politically inspired G-R-O-W-T-H to the continued reverence of price levels of the Phisix, politics have usurped the essential function of the stock market. Prices only matter!
In addition, each time the PSE eulogizes on price levels, as shown during the last three occasions (2013, 2015 and 2016), eventually, the PSEi collapses.
For the establishment, it is of little bearing HOW the present price levels have been attained. As such, stock market inflation is deemed as a politically correct theme, and thereby, must be worshiped. The thrust to push the PSEi with whatever it takes represents a consequence of such entitlement mentality. Damned the markets. Politics rule.
And because bubbles command a religious like following or fanaticism, any opposition or negative developments must be dismissed, censored or rationalized as an aberration.
Proof?
The Philippine Stock Exchange reported on the performance of listed companies for the year 2016. Net income for the PSEi 30 companies rose 12.1% while the constellation of PSE firms posted 17.8%. Revenues rose 6.8% and 6.6% respectively.
That’s nice until one realizes that these had been the handiwork of the BSP’s RECORD monetization of the government’s RECORD expenditures!
But why report on 2016 performance when 2015’s report card was UNPUBLISHED in the PSE’s website? Here are monthly archives of 2016: January, February, March, April, May, June, July, August, September, October,November and December. Nada, zilch, zippo.
Because 2015 eps and revenue data didn’t fit the mainstream G-R-O-W-T-H meme (see center chart)?
And because of the dismal and politically incorrect 2015 performance, a black hole seemingly anchored the PSE’s PER ratio in 2016 published at the BSP. 2016 PERs omitted 2015 eps!
Otherwise, the runup towards the 8,000 level in the post-election July would reveal PER levels at 1996 highs (over 26)!
And even if based on 2016 earnings, current PER ratios are at a pricey 20.23 (based on the average) and 24.92 (based on market cap weightings).
And with dismal 1Q 2017 would the PSE conceal anew these developments?
And because prices only matter, expensive can only become more expensive. Only beneficial effects with little or no adverse consequence are the ramifications of such carefree actions. Why worry when prices always bounce back? The worry comes when losses transform into actuals and when some stocks become wallpapers.
As you can see, it has not just been an issue of overbought conditions, but more importantly, overvaluations, euphoria, selective publications to downright manipulations
In my view, these aren’t signs of a healthy stock market, instead they are signs of increasing fragility, degradation and decadence.
Please go read Ben Graham’s quote above again.
