Where Is the Market Heading?
Most, if not all, stocks in a sector move in unison toward the southward direction. It’s not because there’s a financial or management issue (fundamental). It’s also not because the stocks are technically overpriced and they’re only correcting.
We need to understand that the Exchanges worldwide are in the bearish territory because we have a COVID-19-stricken world. Psychology tells us that when humans are worried, we tend to secure as much as we can. It’s the de facto and de jure attitude of a worried investor.
The main positive catalyst that we’re looking for is the vaccine for COVID-19 that is recognized by the World Health Organization (WHO).
Investors’ confidence will most likely recover as soon as there’s a breaking news that confirms the availability of a WHO-recognized COVID-19 vaccine that can be mass-produced at a relatively affordable price.
From a semi-opinionated observation, let’s proceed with the facts. The Philippine Stock Exchange Index’s immediate historical resistance is near 4,870 while its immediate historical support is pegged at 3,700.
We want to see the index to stay above the support at 3,700; otherwise, the next support level near 2,800 will add more pain to the injury, most especially for traders and investors who do not employ risk management in their strategy.
The main bellwether index needs to break lots of resistance levels before it gets the chance to re-enter the 7,000-ish territory. Breaking the resistance at 4,870 is a precursor to 5,760, which is a precursor to 6,890.
The main index has already incurred a Net Foreign Selling worth over P8 billion year-to-date. Bigger weekly Net Foreign Buying amounts started to register in the last week of February 2020.
The daily Historical Volatility score of the PSE Index is already at 101.85 percent as of closing on March 19, 2020. The last time the PSEi’s Historical Volatility inched closer to 100 percent prior to this year was during the financial crisis in 2008.
There are no clear telltale signs yet that the significant sellers are exhausted. For one, the volume bar as of market closing on March 19, 2020 is red and is higher than the 50 percent of PSEi’s 10-day volume average.
Moreover, there’s no sign of a formation of a bullish convergence between the signal line and the Moving Average Convergence Divergence (MACD) line.
Also, the negative and positive Directional Movement Index (DMI) lines are still in a bearish divergence, and the Average Directional Index (ADX) is still higher than 20 points.
The combination of all these bearish signals and observations forms the probability that the downtrend is still more likely to continue.
Which or What Blue-chip Stocks Are Cheap at Their Current Trading Price?
Most, if not all, of the index stocks’ prices have gone down by as much as 50 percent from their all-time high. The prevailing prices have gone back to the prices between 2010 and 2012.
Elementary mathematics will tell you that all blue-chip stocks are relatively cheap at their current trading prices.
But, is it the right question to ask?
A better question to ask is, “HOW to know WHEN it’s the most logical opportunity to buy and WHY?”
The quality of knowledge is predicated on the quality of questions being asked.
The HOW, WHEN, and WHY questions will make you an INDEPENDENT and TACTICAL investor.
You run the risk of wanting to be spoonfed when your priority questions are the WHAT and WHICH.
How Would You Know WHEN It’s the Most Logical Opportunity to Buy?
Look for the following signs:
- Bullish 10SMACD
- The last price is positioned above the 10SMA.
- The MACD is moving above the signal line.
- Bullish Momentum Power Indicator
- The last candlestick is green.
- The last price is higher than the Volume Weighted Average Price (VWAP).
- The last volume bar is green and is higher than the 50 percent of the stock’s 10-day volume average.
- The dominant range is closer to the intraday high than the intraday low. The dominant range is the price range that got the biggest volume and the highest number of trades.
WHY Should You Monitor These Signs?
It’s because it’s a waste of buying power if you’re the only excited investor wanting to buy, especially if the more deep-pocketed investors are doing the exact opposite of what you’re thinking.
In our Investment Guide for Long-term Investors at Equilyst Analytics, none of the thirty blue-chip stocks have a confirmed buy signal.
Seven blue-chip stocks have a bullish Momentum Power Indicator but a bearish 10SMACD. That’s not a confirmed buy signal yet. Once their 10SMACD becomes bullish, and if their respective Momentum Power Indicator will maintain its bullish status, those seven stocks will get a confirmed buy signal. Once the buy signal is up, investors may start to top up or do a test-buy within the Dominant Range indicated per stock.
On the other hand, 23 blue-chip stocks have a bearish 10SMACD and Momentum Power Indicator. You may add some of those 23 stocks in your watchlist but not in your portfolio yet.
You might say, “Oh, so, you’re a technician and not a fundamentalist. You must be a short-term trader and not a long-term investor.”
Contrary to what you might expect me to say, I am both a short-term trader and a long-term investor.
Since 2001, I’ve observed that fundamental analysis doesn’t have strong fangs in the Philippine stock market.
Why is that so?
I would like to attribute that to the relatively low volume in the Philippine stock market compared to the Exchanges in the US. Besides, we’re still at the mercy of the sentiment of the foreign investors. We only piggy-back their sentiment, so to speak. On a daily basis, the average participation of foreign investors in the total traded value is between 55 to 65 percent. Foreign fundies are the deep-pocketed investors. If they strongly want to move out and you (local investor) heroically want to stay invested without using a trailing stop, it’ll be harder for you to cut your loss as the price continues to drop.
Please understand that I am not saying fundamental analysis, such as analyzing financial statements, is not useful or helpful. We need fundamental analysis in business valuation. I am a businessman with multiple income streams. I do not discount the importance of business valuation.
However, there is a way to forecast if the trend is more likely to continue or not. I’ve already given you the partial checklist above. Given the availability of that methodology in forecasting the probable trend of the stock, why would you hurry in topping up or doing a test-buy if the data shows that the downtrend is more likely to continue?
It’s good to know that the company you’re monitoring is the most undervalued stock in its sector. But if you will give common sense its job back, you will patiently and logically wait for confirmed signs of reversals.
Buying a fundamentally-undervalued company, even if the downtrend in price is more likely to continue, is like deliberately going out to hunt a wild cat down at the expense of alluring a hungry bear to hunt you down, too. Is catching a cute cat worthy of getting unforgettable slaps from a bear?
Visit this online stock market library and search for “reward-to-risk ratio” for more information.
What Should Be the Game Plan in the Coming Days If You’re a Trader or a Long-term Investor?
Whether you’re a short-term trader or a long-term investor, it’s more prudent for all of us to stay on a wait-and-see mode. I have been in 100 percent cash mode for several weeks already. I locked in some gains and pre-empted my trailing stop loss for some.
There is a huge opportunity to make some serious money in the Philippine stock market but not right now. Sellers are still busy cashing out.
Sir Isaac Newton’s third law of motion states that for every action, there’s an equal and opposite reaction.
To translate that from physics to economics, that means the deeper the fall, the higher the potential rebound.
But while anticipating this scientific and economic probability, you should not be buried in the stock market carrying insurmountable levels of stress due to the paper loss that is beyond the amount of risk that you can realistically handle.
Just as how you protect yourself from COVID-19, protect your capital and sanity, as well.
Use a trailing stop. A trailing stop preserves your capital, protects your gains (if any), and prevents unbearable losses. Remember those 3 letter P’s.
Check out the stock market subscription service of Equilyst Analytics if you’d like to level up and learn how to invest independently and trade tactically.
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