Monday, 15 August 2011

Market strategies for confused times

Business Mirror

WHEN stock prices become volatile, moving widely both up and down, investors and traders alike are looking for sound strategic principles that they can rely on to limit losses.

Last week was probably one of the most volatile trading periods of the Philippine Stock Exchange in the last 20 years. We were down (2.4 percent), down (4 percent), up (3 percent), and then flat, and flat again over those five days. In fact, the net change for the blue-chip index was only 115 points or 2.6 percent, which is frankly, not a hugely big deal.

However, there is nothing that frightens investors more than the way the market traded last week.

We started with two significant days down followed by healthy recovery on Wednesday. And then on Thursday prices went crazy, pleasantly crazy with an early-morning 100-point drop followed by a complete turnaround to close almost unchanged. By the way, the newspaper reporting about Thursday trading is what drives me crazy. The headline read; “PSE ekes out 0.5 percent gain.” The implication was that the market barely moved higher. Nonsense. The market moved 100 points higher.

Of the 70+ issues included in the PSE Strategy Guide, the average net change for last week was 1.7 percent down which is not bad. However, if you owned individual issues like PLDT, which was off 7 percent or Aboitiz Equity down 6.8 percent, it was a rough week. Even seeing your stocks go higher in a down market like SanMig Brewery (+7 percent) can cause confusion, not knowing if you should take profits or wait.

Let me say that last week’s trading on the New York Stock Exchange showed some of the most blatant intervention by the US government in the stock market that I have seen in my 30 years of trading the markets. No, I take that back. No one can manipulate a financial market like the Chinese. When the Hong Kong Futures Exchange went down, the chairman unilaterally closed the market for a few days. In 1988 the Hong Kong government announced it would buy shares to push prices higher. I wonder if we could get our Department of Finance to do that here. I have a fine list of stocks they might want to start buying tomorrow. Sure would help out my personal wealth creation.

Nonetheless, we are familiar and are used to central bank intervention in the foreign-exchange markets, but rarely do we experience the government pushing stock prices around. After two disastrous days on Monday and Tuesday that saw the index down 800 points, suddenly in the last two hours of trading on Tuesday prices rallied, erasing almost all of the previous 36 hours of losses. Wednesday opened and prices continued lower to close at the low of the day.

Miraculously, Thursday was nearly all one direction trading: up as if the global financial problems had disappeared overnight. Friday’s trading went sideways as sellers found buyers who were not buying when the index was at 10,800 but who now wanted to buy at 11,200.

As the Federal Reserve has a group that monitors and can intervene in the forex markets, so, too, does the Department of Treasury that “monitors” the stock markets.

Understand this is not like buying P200,000 worth of some P5 stock to have it close a little higher. US government intervention means buying hundreds of millions of dollars worth of shares. It must be good to own the money printing presses.

So what do you do when you see your shares dropping in a stock market that you are being told is collapsing?

Common sense says to sell immediately when the first support price is broken. That takes high discipline and nerves of steel, which most of us lose in the heat of the stock-market battle.

Longer-term investors are inclined to take falling prices as a buying opportunity, knowing that sound national and corporate fundamentals, like we have in the Philippines, will bring the price higher eventually. The concept is called averaging down. There is nothing wrong with averaging your price. However, I do not recommend buying when prices are falling. It is better to “average down” when the trend has changed and prices are going up. You will not have bought at the low, but you will not be buying as prices are going lower.

For issues going higher in a declining market, I think that it is always prudent to lighten the load by selling part of your position to put some of your profits in your pocket.

The low for the week was at the 4,130 support area. We closed above the important 4,300 line. Life and the market are still good. On a personal note, you can follow me on Twitter @mangunonmarkets.

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