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Intelligent Investing

Buying window

/ 05:14 AM August 06, 2018

Last Saturday, Aug. 4, our chief technical analyst, Juanis Barredo, and I presented our views on the market in COL Financial’s midyear outlook briefing. Since I am a fundamentalist and Juanis Barredo is a technician, there are times when we don’t see eye to eye. This time though, I am pleased to note that our fundamental and technical indicators were supportive of each other.

Below are the key messages of our discussion last Saturday.

There is a good chance that we have already seen the low of this correction. In June, the PSEi hit a low of 6,923. Fundamentally speaking, there is a good chance this was already the low given that at the said level the PSEi was already down 23.7 percent from the peak. During the past few major corrections, the PSEi fell by an average of 17.3 percent from the peak, while it fell by an average of 23 percent during the last three major corrections.

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Moreover, at 6,923, the PSEi was trading at only 15.7 P/E while numerous stocks were trading well below their 10-year historical average P/Es. During the past three major corrections, the PSEi also bottomed at around 15X to 16X P/E.

Finally, expectations are more subdued and easier to beat as forecasts for certain economic indicators and earnings growth have been adjusted to more realistic levels in our opinion.

Technically speaking, there is also a good possibility that 6,923 is the low as 6,900 to 7,100 is a major support based on the PSEi’s five year rising channel. The PSEi’s current rally is very strong, allowing the index to finally break above the down trendline that has been in place since early this year.

However, the rally we are seeing today is not sustainable in the short term. As a fundamentalist, I don’t expect the market’s current recovery to be sustained in the short term since we continue to face challenges such as rising inflation, weak corporate earnings growth, continuous strengthening of the dollar (as the US Fed raises rates into 2019) and uncertainty toward the US- initiated global trade war. In my opinion, these challenges will continue to dampen investor sentiment and prevent the stock market from going up sharply in the short term.

Meanwhile, the PSEi is close to a major resistance which is 7,900. Bottoms and reversals take time to form and the PSEi currently does not have a solid base yet.

Coupled with the fact that August and October are seasonally weak periods in the Philippine stock market, we will most likely see a correction soon after, which means the PSEi will most likely stay sideways or consolidate in the short term.

Any correction from here is a buying opportunity. That said, since both fundamental and technical indicators support the view that we have already seen the bottom, we should not be fearful of any possible correction from here. Instead, we should prepare ourselves to buy the market once it goes down as this would be a good opportunity to position for the market’s next leg up.

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TAGS: Business, COL Financial’s midyear outlook, Juanis Barredo
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