We had only two days of trading on the first week of the year. And, so far, there seems to be nothing of significance to note.
To recall, when we ended trading last year, the talk in the market was that stock prices were already at oversold levels (stock prices were already too low due to extensive selling).
This observation was seemingly validated by the initial uptick of stock prices when the market opened for the first time this year on Thursday, Jan. 2: The market opened at its low for the day of 5,923.72, then closed at the session’s high of 5,982.26 with a net gain of 94.43 points or 1.6 percent.
This was, however, immediately reversed the following day. The market fell to 5,947.93, resulting in a net loss for the day of 36.33 points or 0.61 percent.
What could be significant to note about the first two days of trading was that, because of the immediate pull back in prices, it debunked the notion that the market was oversold—stock prices were not yet that low, after all.
Wall Street, on the other hand, had the following stock movements: Stocks immediately fell as trading opened for the first time this year on Jan. 2. The Dow Jones Industrial Average, S&P500 and Nasdaq indices fell from their record high perches as follow: the Dow closed at 16,441.35, down 135.31 points or 0.82 percent; S&P500 closed at 1,831.98, down 16.38 points or 0.88 percent, and the Nasdaq closed at 4,143.07, down 33.52 points or 0.80 percent.
The following day, Jan. 3, the Dow recovered with gains of 28.64 points or 0.17 percent as it closed at 16,469.99.
The S&P500 and Nasdaq fell further to 1,831.37, down 0.61 point or 0.03 percent and to 4,131.91, down 11.16 points or 0.27 percent, respectively.
Looking more closely at the two-day trading results of the three major indices on Wall Street (disregarding the small gain registered by the Dow on the second day), it appears that stock prices on Wall Street could be influenced by one or both of two factors: First, market prices are not yet that low and/or second, investors are very cautious at the moment because the market continues to stay unpredictable that they prefer to trade rather than hold long positions.
The same interpretation may apply to the local market’s first two days of trading. Stock prices are not yet that low and the local market remains unpredictable because it is still influenced by investors’ sentiments on Wall Street and other major equity markets of the world.
Market pattern of 2013
Last year, the market generally went into a full circle: It started at 5,812.73 and ended at 5,889.83—or 77.1 points or 1.33 percent higher—to register one of the worst market performances in the world.
Looking back, while equity markets all over the world struggled to move up, our market was already up 1,590.42 points or 27.31 percent in early May.
For the record, the market hit the record-breaking session high of 7,403.65 on May 15, where it also registered its highest record close of 7,392.20.
The market held on within the 7,000 level that month. At the onset of June, however, the market gave in and fell to the low of 5,678.73.
The market picked up in July, peaking on July 25 at 6,829. 96. By Aug. 28, however, it hit the low of 5,771.38.
Again, the market recovered in September and peaked in October. It hit the high of 6,648.08 on Oct. 23.
But then, the market started to fall the following November, continuing its decline all the way until the end of trading in December.
With the foregoing market pattern, the market had three peaks and two bottoms wherein one could have made—assuming perfect timing—a return of 27.31 percent on the first peak, 17.46 percent on the second peak and 15.63 percent on the third peak or for a total return of 80.40 percent.
Realistically, though, anyone actively engaged in the market in 2013, would have suffered at least a hit by the two downswings of the market.
If nimble enough—meaning, you were able to immediately discern the market’s direction and was quick enough to act with the right decisions – you could have made a high of 20 percent and a low of 10.0 percent return.
Bottom line spin
Over the weekend, I conducted an informal survey on how the market might perform this year among a number of friends, who were also active market participants.
There were a number of scenarios I got. But by discarding the least of scenarios drawn by participants in the survey and leaving the most imagined patterns of performance by the market this year, I got two popular guesses.
The first relates to a pattern where the market will make a run-up in the first quarter that will last up to the second quarter and, then, move sideways to lower until the end of the year.
What could possibly make this happen are the anticipated favorable economic and market data that are due for release in the first quarter, including the end-of-the-year corporate results for 2013 that will also start to come out all the way to May.
The second scenario is a pattern wherein the market is imagined to slightly go up by the first quarter and proceed to go higher by the second quarter, then move sideways until it goes up again toward the end of the year.
The minimum net return for both market scenarios will probably be about 15 percent. The second market scenario, however, may top the first with a higher net return of 35 percent.
What could make the second imagined market pattern more likely to happen (in addition to the above said reasons) would be that the country’s economic growth forecast was expected to be the second best in Asia for 2014. This will be withstanding the fact that the economy is estimated to grow by only 6.8 percent.
The continuous climb of stock prices abroad (Wall street, Euro market and others including Korea and Japan) from their December 2013 levels, on the back of estimated growth rates of 3.5 to 4.5 percent, will render asset valuations in the Philippines comparatively lower.
In both market cases, the trend of stock prices is expected to be dictated more by corporate fundamentals than by technical considerations. In this case, the “bottom-up method” of investing will stand out as the most ideal strategy to use.
So, watch out for my article on the “bottom-up method.” We’ll walk through it, next time.
(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)