US stocks continued to rally last week with the three major market indices—the Dow Jones industrial average (DJIA), S&P 500 and Nasdaq—hitting record highs. The relentless climb of these market indices has also seized the curiosity of market commentators to talk about the prospects of the US market to again breakout into another full-blown bull run this year, resulting in the breaching of all-time highs by the three major indices.
I was able to watch on TV one such discussion on the subject last week. The discussion centered particularly on the S&P 500, being the more popular and broader market indicator for the US equity market. The question brought before the two market analysts was: “Will the S&P 500 break 2,000?”
Given her fundamental orientations, the female analyst expressed doubt the S&P 500 would ever hit or break 2,000. She downgraded the idea with the categorical statement that the S&P 500 “will not and, certainly, cannot break the 2,000 level.” She cited the preponderance of studies that pointed to low earning prospects owing to low growth rates expected this year and next, especially taking into account the fact that earnings growth for the past several years was largely part of “cost-cutting, cheap financing or share buybacks rather than because of more revenue.” In other words, earnings can now be increased only by “increasing the company’s top line revenue,” which is unlikely to happen.
Interestingly, the male resource person is of technical orientation that he—certainly—had a different view and opinion on the matter. According to him, current price trends showed that S&P 500 stocks are gearing up for a fast climb toward the 2,000 target—that could just happen very soon. He made the bold forecast that this could possibly occur in the next two to three weeks.
Local conditions
Coincidentally, there is a running debate among local market watchers, with both fundamental and technical analysts alike similarly locked in opposite positions about local market trends. The chart studies, according to technical analysts, showed that the market on the whole was poised to go up higher even before last week.
True enough, the market advanced again last week with another net gain of 56.84 points or 0.84 percent when the PSEi settled at 6,481.83. This close of the market last week also happened to become another record high for the year.
Listening to their explanation, the market is said to have gone through three decisive technical bottoms within the past 52 weeks. In the last 10 weeks or so, the market has reached and completed its third bottom with the so-called “higher low,” a trading movement that serves as a sign the market will be changing its current downward direction to that of an upward trend.
As trading records will show, the market has been climbing since the start of the year. On a year-to-date basis, the market has advanced by 592 points or 10.05 percent. With such speed and strength of the market, local technical analysts find no reason to doubt the market has the power to climb higher and may even be able to break 7,000 well before the end of the year.
Local fundamental analysts, meanwhile, are maintaining a conservative view on the matter despite the market’s recently increasing trading business transaction. They maintain that current business transactions in the bourse are precariously driven by foreign volume and value turnover.
Based on the bourse’s “Weekly Market Watch” publication, price-earnings ratios (PERs) have likewise been going up since January. Trading results for the period showed that stocks in the PSEi list traded within the range of 18.08 times to 18.36 times. A month after—or for the week ending Feb. 27—market PER has gone up to 19.2 times. But foreign transactions had gone down to 57 percent of total market value turnover.
Bottom line spin
Both schools of thought have shown effectiveness and relevant application in stock investment and trading, for fundamental analysis, according to one good reference, could be “a useful predictive tool for price direction and indicator to the general magnitude of stock prices.” However, it “rarely tells when the price movement will begin or how far prices will travel.”
Meanwhile, “technical indicators can give direction and timing but they fall short in giving indication on the magnitude of the anticipated price movement.”
Going through the little facts presented and bearing in mind last year’s experience with both analytical tools in use, the market certainly looks like it has the strength to break 7,000. Market psychology is strongly bullish, reinforced by strong money inflow, with foreign investors acting as market catalyst.
The continued climb of the market despite a reduction in foreign investors’ participation from 60 percent to 57 percent within the last 30 days is further indication that more money is destined for the equity market, albeit from local investors. The only weakness in the current market setup is a sudden selloff from foreign investors as seen last year. Such could cause a major change in the market’s sentiment and direction.
With both approaches unable to help us determine events ahead of time, especially those that affect market trends, it is better to invest on a long-term basis in value and growth stocks. Such strategies always withstand the test of time and major events.
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