Most ignorance is vincible ignorance. We don’t know because we don’t want to know—Aldous Huxley
In this issue
A Bull Market Says The Headlines, A Bear Market Underneath!
-One Crisis to the Next: Dengue Crisis? Duterte Says Dangerous Times Ahead, Why?
-Phisix: Skewed Distribution a Product of Manipulation
-Two Universes: Headline Bulls, General Market Bears
-Falling Financial Liquidity Shapes Negative Trading Breadth and Low Trading Volume
-Testing the 2009 Trend Lines
A Bull Market Says The Headlines, A Bear Market Underneath!
One Crisis to the Next: Dengue Crisis? Duterte Says Dangerous Times Ahead, Why?
Food Crisis. Water Crisis. Power crisis.
Dengue crisis, next?
From Philstar (July 21): The number of dengue cases has risen to 50,385 cases, with 227 deaths reported in five regions, the National Disaster Risk Reduction and Management Council (NDRRMC) reported yesterday. In a dengue monitoring report released, the NDRRMC-Office of Civil Defense (OCD) said Western Visayas has the most number of cases at 18,834, with 94 deaths. A dengue outbreak had been earlier declared in Iloilo, Capiz, Aklan, Antique and Guimaras. Negros Occidental is under heightened dengue alert. Sixty-two deaths due to dengue were reported in Central Visayas, 50 in Calabarzon and 21 in Soccksargen.
And what’s this? The Philippine leadership smells “very dangerous times ahead”?
From the Inquirer (July 9): Sensing “very dangerous times ahead,” President Rodrigo Duterte said on Tuesday the government should continue its efforts in increasing the capabilities of the military and the police…He then asked Congress to support his administration by pushing for measures to ensure a stronger AFP. “I hope that by the time I make my exit all that would be in place. I am not belittling the events to come, or the person coming in to be the next President. I don’t know who. I’d rather leave with a strong military and police [that are] equipped to challenge the enemies of the state, especially terrorism,” he said. The President said he could feel his hands “sweating” just thinking of the possibility of dealing with terrorism on a broader scope.”
Coup? The leadership has total command of the military, yes? Isn’t he very popular? How about terrorism? Haven’t the terrorists been quashed? Haven’t they been relegated to the countryside? Or has “very dangerous times ahead” been used to justify the conditioning of the public’s mindset for possible imposition of martial law? Or have “very dangerous times ahead” been used to divert the public’s attention on the controversial fishing boat collision involving the Chinese at the West Philippine Sea?
Even more, have there been undisclosed reasons to prompt the leadership to utter such dour forecast?
Phisix: Skewed Distribution a Product of Manipulation
Last week, I wrote
Share prices of BDO, the biggest market cap bank, has been forcibly pushed upwards (through marking the close) in many of the recent sessions. Such actions appear to be designed to inspire bank issues to participate in the quest to redeem the sector's zenith in January 2018, as well as to propagate the PhiSYx back to the record high of 9,058.
Bank stocks have been a drag to the grand delusions of glory from easy money policies.
Even if they succeed to do so, it just shows how detached the markets have been with reality.
The headline equity bellwether, the PhiSYx, barreled through the 8,300 threshold to stretch its weekly winning streak to eight weeks in the last nine.
To ensure the attainment of OPERATION 9,058, banks stocks of the composite index were frantically bid higher. As such, the bank index, which soared by 4.95%, provided the most important pivot to the 1.58% weekly gains of the PSYEi 30 to close the week at 8,270.07 slightly lower than the 4Q 2017 high.
Figure 1
PhiSYx 9,058.62 signifies the zenith of the headline index established on January 29, 2018. And to attain the objective of toppling the previous or 2018 apex, end session operations targeting the biggest market capitalization issues have played a crucial role. (figure 1 lower window)
Based on full market capitalization (outstanding shares x market price), the share of the top 5 issues command a 41.62% of the index. The top 10, 62.07% share, while the top 15, 76.77% share. (figure 1, upper window)
And because the index, according to the PSE, “is computed by deriving the change in the index components’ current total free float-adjusted market capitalization from the base total free float-adjusted market capitalization, and multiplying this change with the previous day’s closing index level”, free float adjustments add to the skew.
In other words, because of the highly skewed distribution and calculation, the index has ultimately been determined by the performance of the biggest market cap issues.
Common sense tells it takes only movements of the top 10 issues to shape the index.
And the immense deviances in the distribution of market cap share only expositions that record highs have been meaningless or mispresents the index as these displays only performance of a segment of its component members.
As proof, only nine issues set the record 9,058 in 2018, in contrast to 2017’s 11 and 2016’s 12. Incidentally, the 2016 and 2017 highs were at 8,050s. At the present 8,300, seven issues have set record highs. The breadth continues to narrow even as the PSYEi scales new heights!
The highly flawed calculation of the PSYEi index could be seen as the embodiment of the fallacy of division, “something that is true for a whole must also be true of all or some of its parts.”
And because of such inequitable distribution, tweaks to tailor-fit the index to political events may have been occurring.
For instance, weekly returns on the SONA and pre-SONA week have been magnified since 2017. During the SONA week of July 2018, the PhiSYx was pumped by a stunning 4.08%! Last week’s 1.58% could reverberate with 2017’s two-week 2.34% advance.
And with the way end session operations have been flagrantly used, imbalances accruing in the distribution of the index composition have not been surprising at all!
Two Universes: Headline Bulls, General Market Bears
Figure 2
An all-out coordinated effort was used to pump bank stocks in the name of BSP and the FED’s easing, ergo, Bank of the Philippine Islands rocketed 14.74%, MetroBank 7%, and SECB 4.47%. While BDO was the primary instrument used, it reeled from profit-taking following a fiery 7-week upside ascent in nine weeks. BDO closed marginally lower by .13%
Yet, except for PBC (+9.6% week), the broader bank issues barely performed on a similar scale. The chart of bank stocks highlights such conspicuous divergence: index stocks forcibly pushed higher as the lesser peers significantly underperform. So it’s either the broader banks would eventually catch up or the interim gains of the PhiSYx banks will fade.
For an industry undergoing a fall in gross interest margins, cash reserves, deposits and loan growth rate, and raise funding through the most expensive means, and most importantly, surging published NPLs, these supposedly represent sound foundations?
No wonder the world has been undergoing a panic bid on negative-yielding bonds? Rationalize all forms of excessive speculations!
Divergence between the headlines and those under the hood or the PSE’s broader universe has been similarly blatant.
I have been tasked to seek potential short term (scalp-momentum) trades, so 195 issues of the 268 (non-PSE 30) listed have become part of my radar screen. Of the 195 issues only 46 or 24% have shown upside performance as of Friday. The rest have traded sideways or have been declining!
I define upside as 20% up from the lows within 4Q 2018 to the present and a price trend must span outside of any downtrend channels.
To consider, the PhiSYx have risen in 8 of 9 weeks yet it is the bear and not the bulls that rules! The Pareto Principle operating underneath the headlines indicate that most stock market participants would have been losing money had they placed them on the broader universe of the PSE. It’s no wonder why some clients have expressed their disappointments to their brokers.
Real estate, the best performing sector only has a 38% participation rate! Banks/Financials have the lowest participation with 6%!
Falling Financial Liquidity Shapes Negative Trading Breadth and Low Trading Volume
Naturally, the bearish breadth comes along with falling volume.
To push up stocks requires money. And low peso volume highlights the lack of interest in the markets, despite the headlines.
Figure 3
The average peso volume has been in decline since 2014, which has been backed by the peso output (weekly aggregate volume divided by total trades divided by the number of days). With fewer peso trading the markets, the lesser participation rate for the bulls. (figure 3, upper and middle window)
The PSE doesn’t operate in isolation. It competes with the government, with banks and with the bond markets for access to domestic savings. Thus, when financial liquidity falls, money flows to the stock market should also be restrained.
Growth rate of cash and due banks of the banking system have been declining since 2014.
The other factor that would influence the PSE’s activities would be the global financial conditions through foreign flows.
So unless domestic banking system conditions improve to filter towards general liquidity, the PSE’s breadth should remain under pressure.
An authentic bull market should see no less than half of the breadth on the upside. And that’s not what we have been seeing. Not even close, but the opposite.
A bull market according to the headlines, a bear market underneath.
Testing the 2009 Trend Lines
Figure 4
From a longer perspective, the headline index broke down from two critical 2009 trendlines last year.
It rallied to recover from the loss of the third trend line (brown trend) and has now been attempting to break the resistance, the former support level of the second (2009-2015-2016) trend line represented by the blue trend line.
Remember that the first 2009 trend (green trend), which broke down in 2015, has served as strong resistance against headline index’s charge in 2016 and 2018!
It should be interesting to see whether forcing breakouts will succeed or if it can be sustained if it does.
