Scarier days ahead
We had a shortened trading period again last week due to the observance of “Eid al-Adha” last Monday, a new non-working public holiday declared by the administration.
Incredible as it may seem, shortened trading periods appear to have negative impact on the market—they often lead to technical declines.
If this is allowed to linger due to delayed action or reaction from buyers, they could lead to actual turning points.
To recall, trading was also shortened to four days three weeks ago by Tropical Storm “Mario.” As you may have seen, the market went on a decline, since then.
On the week ending Sept. 19, the market was trending upwards. At that time, it enjoyed a weekly gain of 85.41 points or 1.19 percent.
At that point, too, the market was at 7,287.29-only 112.71 points away from the exciting breakout level of 7,400—an opportunity that could have emboldened market bulls to challenge the market’s trading bar.
Because of the shortened trading period, the market lost its momentum. As a consequence, it dipped the following week ending Oct. 3, and ended with a weekly loss of 14.27 points or 0.20 percent.
Likewise, the market immediately tanked last week upon resumption of trading on Tuesday. This was followed by another decline on Wednesday with a bigger daily loss of 53.70 points or 0.74 percent, thereby, bringing down the market lower.
The market recovered on Thursday, stimulated by the bargain hunting activities of market bulls or buyers. This also signifies the continuing bullishness of the market.
The recovery, however, was limited to a daily gain of only 16.21 points or 0.23 percent, which meant that demand from market bulls (buyers) then was not big or strong enough.
It was not surprising, therefore, to see market bulls to be easily overpowered the following day, Friday, by market bears (sellers).
When the dust of trading settled at 7,167.35, the market was down for the week with a weekly loss of 79.98 points or 1.10 percent.
If the shortened trading period last week would also lead to increased market volatility that would lead to more declines like last time—abetted by increasingly unfavorable developments that could erode market fundamentals—we may see “scarier days ahead.”
Global fundamentals
With the return of market volatility that caused major indices to post their biggest declines in recent days, US market analysts feel that Wall Street is still holding firm and strong. Admittedly, though, such market volatility is dangerous.
For one, they admit that US stock prices are already trading at high PE multiples. This means the market may have broken away from fundamental values. This is because the market has been pricing every dollar of earnings much higher than it should regularly be.
This is a negative factor that could stunt further expansion of the US market. It can also lead to increased market volatility that could send Wall Street to steeper declines.
The uncertainty brought by the Fed’s position on tapering is also another aspect. Strong economic news has prompted fresh talks of ending the stimulus program sooner than later. Many believe the market is still unprepared for an early end of the stimulus program. It could hurt—more than spur—the market, and this could set back overall economic gains.
Many also believe the Fed does not have that much ammunition anymore. As one report described it, “the Fed is left with empty pockets, and they’ve already put the spare tire on the car.”
This makes raising interest rates sooner as something inevitable. When this happens, this will put the US market in a delicate situation. As one report further said, this puts the country in what it called a “dammed if you do, dammed if you don’t” position. Any which way, it would spook the market that might again lead to more pullbacks.
Amid such observations, Wall Street stock indexes fell for the third straight week last week, with the S&P 500 reportedly “suffering its worst week since mid-2012.”
Investors were observed to have fled to the safety of government debt, “with the 30-year Treasury bond’s yield nearing the 3.0 percent level for the first time since May 2013.”
Confounding the situation, global equities ended at one of their worst closings of the year last week, too. It was burdened by newly flashed warning signs, as follows: Slowing global economic growth led by Europe and China, again; by collapsing commodities especially the apparent slumping of oil prices to a four-year low indicative of falling demand; the surging of the dollar; the Russian sanctions; and Ebola.
In summary, these developments are darkening global investors’ outlook. Many, as of last week, “scrambled to reduce big bets in stocks and other risky assets” that led to the worldwide fallout.
Undoubtedly, these unfolding global market developments will further make us see many more “scarier days ahead.”
Bottom line spin
Notwithstanding these apparent developments, we still have a bull market. Our market’s short term outlook, however, might become more dicey and scarier.
The ongoing declines will possibly become steeper. But alternating volatility will characterize these movements—it will head down one time and head up the next, with no particular loss or gain as in a technical consolidation of the market.
Since we don’t know if these will get worse, the best one can do at the moment is to resort to a trading and investment plan.
Like I have mentioned last time, some investing strategies—like trading the ranges—only work to some kind of personalities and temperaments.
Surprisingly, seasoned investors recommend the following trading and investment plan for the moment: If you are a natural trader, trade; if you are a buyer and holder, hold till you are sure what to do; and if you are a diversified portfolio manager, rebalance.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at [email protected] , [email protected] or at www.kapitaltek.com)
