Home on the range
6:15 pm Tuesday 2 February 2010 Philippine Stock Exchange Index 2864.18 (-0.66)
Investors are probably perplexed today after seeing Wall Street stage a rally overnight yet seeing the PSEi going down. It is even more discouraging that the local market opened higher only to invite further selling. There’s been a number of issues that have gone through nearby support levels – AC, TEL, MEG, MER, FLI and PIP, to name a few. I guess many are trying to figure out whether this is the beginning of the down trend, a major correction of the 2009 or simply a minor correction of the recent rise to 3121, the nearby peak of the market.
First, let’s look at the major or long-term trend. Long term trends are normally determined by underlying economic fundamentals. Is 2010 going to be better for the economy than 2009? I think the answer is an unequivocal yes. Imports and exports are recovering, domestic consumption is sustaining its growth, the global economy – led by the U.S., China, India and the rest of ASEAN – is expanding. Global liquidity is still growing albeit much slower than last year. All of these point to a long-term positive effect to companies listed on the PSEi.
Next, let us have a feel on the intermediate term examining whether a major correction of the underlying trend is happening. With the sell-off in stocks like AC, TEL and MER and the pull back in stocks like MBT, BPI, AP, RLC, ALI, FGEN, EDC, FPH and a lot of the mid-cap stocks, what it looks like is a major correction is going on. What has become obvious to me is the market’s reaction to the 3121 level of the index. When the market failed to penetrate that level, people knew in their hearts that they have to protect the gains they made over the last few months.
Today, we have some stocks which have appeared to have broken down indicating that either a number of foreign portfolios are abandoning our market or a lot of local investors are significantly reducing exposures to equities. Actually, I think nervousness has gone ahead of these fund mangers because whatever momentum had been built in the first few days of 2010 has been doused upon. It looks to be money management time again. I believe, however, that in the back of their minds most investors like the market and would be coming back when they see some stability in prices. I think that it will be soon, but I do not see this market surging past the 3130 peak that we saw late in 2009 before the May elections. I am suggesting that what we will be seeing are prices coming to support levels sooner than later and then establishing a trading range between 2800 and 3130. That is a very comfortable 330 points or 12% price range. That is a range worth trading.
I would suggest homework time again for investors, traders and punters alike. In my experience, a trading range provides opportunities for out performance. There are stocks that are cheap valuations wise already. MBT and MPI are two examples; MPI should be worth at least 2.50 while MBT should be at least 44. PIP and AGI might also be cheap as the stories behind them are quite interesting; PIP has a potential M&A with the global company and AGI because of the success of its resort across NAIA 3. I would recommend investors to start scouring the market again for stocks with real value because there is money again to be made.
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