The market’s fall last Tuesday by 318.95 points or 4.64 percent reminded me of the market’s long overbought (overpriced) condition.
Its plunge on Thursday by another 442.57 points or 6.75 percent made me realize how much the market had been overbought.
But having been used to seeing the market rally after every drop of 100 points or less since it had been declared as “one of the priciest markets in the world,” you tend to disregard—or even start to doubt—the basic dynamics influencing market prices.
You even begin to discount the possibility of major market dips, like what happened on Tuesday and Thursday, not to mention the fact that they could occur in succession as they did last week.
The market fell by as much as half of what it gained for the year when it incurred a loss of 761.52 points in just those two days of trading last week.
Market jitters
The volatile trading results of the market last week were said to be influenced by the potential policy shift the US Federal Reserve might take with regards to the stimulus program employed to invigorate the US economy.
As reported, there was very little left from the package for the program. Some $770.5 billion out of the $787 billion appropriated by the US Congress in 2009 has been spent as of Aug. 29, 2012.
Since then, the US Federal Reserve had been sending signals of its desire to terminate the program. These signals had been met with apprehension by US investors creating volatile trading results.
US investors view the program’s termination to be untimely. They fear that such move at this time will usher in a regime of higher interest rates that may hinder further growth and debilitate the US economy’s ability to maintain the progress it has made so far.
In other words, US investors felt that such policy decision could push back the US economy into recession.
Since the US equity market has historically performed similar to how the US economy fared, the market performance has been used as yardstick to measure the state of the economy—as well as a reference to measure the impact of the stimulus program. Thus, signals related to the possible termination of the economic package has always resulted in massive selling by US investors, pulling down major indices on Wall Street.
This has been the situation on Wall Street since February which, in turn, has affected the performance of overseas markets like ours.
Last week, our market posted its biggest total weekly loss on concerns connected with the issue. It suffered a total weekly loss of 459.69 points or 6.86 percent that consigned the main index down to 6,242.26.
At the close of trading last Thursday, our market has given back a total of 1,278.08 points from gains it made since the beginning of the year.
However, due to the technical rally on Friday, the market’s overall loss was trimmed down to 1,149.94 points.
Bottom line spin
The market’s record peak for the year was 7,392.20, established at the close of trading on May 15, Wednesday.
On the same day, the market hit the session’s high of 7,403.65, which up to now has remained the market’s all-time session high.
At these points, the market had chalked up a total gain of 1,539.47 points or 26.48 percent and 1,590.92 points or 27.40 percent, respectively.
At these points, too, the market also reached the valuation index of “no less than 19 times estimated profit.” This price multiple is found to be “the highest among gauges in 45 emerging and developed markets.”
The market’s high prices were attributed to both the high inflow of foreign funds and record earnings by local companies.
Added to that, as claimed in one review, the present dispensation’s “Tuwid na daan” policy had likewise contributed in making the local market one of the “best risk-adjusted” investment havens among major markets.
If we subtract the market’s losses from its total gains to determine where it is now compared to where it was at the beginning of the year, it is up by only 429.53 points or 7.39 percent.
At that level, the market’s price valuations should now be much lower than they have been two weeks ago. They should now be at the same range of prices prevailing in other major markets.
Considering that June has always been an up month, we could conclude that the market’s present level was now low enough to bring it to where it had been.
On second thought, the US Federal Reserve will have a policy meeting on Wednesday on the future of the stimulus program. Most US economists expect the US Fedreal Reserve to continue with the program. However, the US Federal Reserve might remain ambiguous as to when it will terminate the program. If this happens, the US Fed’s position will continue to generate market jitters and volatility.
The situation in Europe and the signs of slowing growth in China may also have significant impact on the trading direction of the market.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph , densomera@msn.com or at www.kapitaltek.com)