Market consolidation

In anticipation of the Chinese ghost month of August, the market moved within a tight range last week. The ghost month, which is from Aug. 3 to 31 this year, is believed to attract more bad luck than good.

Interestingly, the local market indeed experienced bad fortunes in the same month the past few years.

However, given the market fundamentals that are slowly unfolding here and abroad, the market’s inability in the past two weeks to advance can be construed as the start of an awaited consolidation.

When the market entered the third week of January this year, the market immediately stumbled to its 52-week low of 6,084.28. The market strengthened thereafter, only to be interrupted in the last week of March. By May, the market was down to 6,991.87.

The local bourse then resumed its climb to finally close last at 7,963.11 last week.

Notice the market is immediately able to gain 1,000 points in two months or less to offset an earlier loss of 400 to 700 points.  This indicates the market is very strong and robust as it reflects the presence of enough interest from investors, both local and foreign.

However, the market’s climb had always been disrupted by sell-offs—apparently to protect earned profits—that, in turn, have rendered the market volatile and soft.

There are two major circumstances holding back the bourse’s performance lately. The first was the liquidity brought in by the two recent initial public offerings (IPOs): Golden Haven Memorial Park and Cemex Holdings Philippines Inc.

The former was a relatively small issue of less than P1 billion. The latter, held barely two weeks ago, was about P25 billion.

Contributing to the present market predilection to be volatile on the downside is the serious concern on valuations.  Based on last week’s pricing, the various sectors of the market showed relative high valuations.

The market benchmark index or PSEi, for instance, have a price-earnings ratio (PER) of no less than 22x.  In other words, the average price multiple of the 30-component stocks of the PSEi is at least 22 times their earnings.

The sector that has the highest pricing multiple is the service sector.  Its component stocks are trading at an average 27.19x. By comparison, the poorly performing mining and oil sector is at 26.33x.

It is also interesting to note that despite the market’s generally high valuation, it continues to be active and strong. Average daily trading volume and value turnover have improved, especially for big ticket items.

For a time now, average daily value turnover has been at the P10 billion level.  Should this continue until end-August, and with foreign investors acting more as net buyers, it is very likely the market will rally immediately after.

Sadly, the rally may not last long.  Considering the market’s episodes of run-ups and sell-offs since the start of the year, the market may need more than a daily average value turnover of P10 billion. It may take until the end of the year for the market to reach a bigger average daily value turnover. By then, the present administration may have already rolled out its economic plans and programs.

In view of these considerations, the market’s consolidation may take the whole of the third quarter; and a possible run all the way to October.

(You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)