‘The future is the consequence of the present’

As I understand, this is an ancient saying lifted from a collection of Asian folklore. It’s a timely word of wisdom that I think is relevant at these times to investors who had been thrown into a quandary over the market’s—tragic but comic—erratic behavior.

Really, the market has been difficult to read. I found friends and associates alike lost in the situation. For, while it had been swayed predictably by only two lingering factors (though, admittedly, of worldwide importance), their impact to daily trading results had been somewhat random which, in turn, had made the play of stock prices all the more hard to guess.

Needless to say, the progress of the US economy continues to disappoint and encourage at the same time in some random sequence. The European debt crisis, as it continues to linger for the longest time, has been alternately moving daily trading results, too, in similar fashion.

One bright side remains, though. While these issues continue to be unresolved, market outlook worldwide is becoming more positive.

Even at a relatively lower volume and value turnover, stock prices are turning upbeat. Our local market is among the first to display such willingness to play—so that, if you will remember, I made the bold call to “start taking positions” as early as two weeks ago, while the popular mindset then was to “sell and stay out.”

On mere impressions

But like I’ve been saying, market trend all over the world had been dictated wholly by perception. It had been trading on pure sentiments rather than on the basis of facts.

This behavior of the market brings back memories to events that happened during the early recovery period after the subprime crisis.

In 2009, the movements of stock prices on Wall Street were more influenced by reported findings that the US economy was performing “not as bad as it was estimated rather than if it was actually improving.”

In the same way today, the trend on Wall Street is again being determined, for example, not by the net rise in the employment statistics but rather as to whether the unemployment statistics were lower than estimated.

Likewise, the unfolding developments in the race of providing a solution to the debt crisis in Europe has become the moving element as to whether the market may turn bullish or bearish in any given trading day.

These days, the mere impression that a definitive resolution on the state of the US economy along with efforts to find a solution to the European debt issue had made markets move up or down.

Thus, in summary, the markets have been moving on mere perception. It is propelled by the sentiment, aptly captured in the expression, “Surely they’ll be figuring out the solution sooner or later.”

Further discussions

With the above observations, analysts are now equally divided as to the present state of the market, too. Some kind of a debate is now at hand tackling the following issues: The first issue is, “Where is the market standing on at the moment?” The second issue is, “Where is it heading to right now?”

Some say the market had been driven down to the “bear market territory,” so much so that the present stock run-up is nothing but a false market rally that will not amount to any change in the nature and trend of the market.

This group of analysts cites the still far from clear picture of the state of the US economy as well as the still to be completed detailed plan to contain the European debt issue to support their claim.

At the extreme end of the debating panel are the rest of the analysts who contend that the market had been all the time in “bull market territory” and that the recent setbacks were mere varieties of what is technically called “market corrections.”

Therefore, the present market run-up is but a continuation of the “bull run” that had since occurred after the last global market meltdown following the subprime crisis.

They cite the view that, while it is possible for the US economy to fall into a double dip recession, breaking in data shows it is not about to tank. It is not only performing as fast as desired. This is because the recovery is taking more time but, nonetheless, surely on the way.

Bottom-line spin

In some respect, the claims of both camps are the same in that the present market run-up are but a part of the market’s current trend.

Their respective claims about the state of the market, however, have a telling impact on the medium- to long-term prospects in the market.

A bear market rally is flitting as it is “followed by another period of market decline leading to a pronounced downtrend.” With that, trading gains are small while the odds of failure are extremely high as well.

In contrast, a market rally arising out of a bull-market correction produces a variety of good stock plays on a broader scale of the trading board. The trading gains are as well bigger. Added to that, the odds of failure are likewise relatively lower. More importantly, value stocks tend to become more likely to appear at this period.

Going by the theoretical definitions of a bull and bear market, I find the contention by analysts that the market is still on bull market territory more plausible. This is even if a bear market and bear market rally are defined respectively as follows: The first is a “downturn in stocks prices to about 20 percent or more over at least two months” by issues in the major market indices accompanied by “widespread pessimism,” and the second is sometimes known to be a 10- to 20-percent increase in prices during a bear market period.

In conclusion, following what the cited Asian adage is telling us, the present market run-up should be leading us to more excellent medium- to long-term opportunities.

(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected] or directly at www.kapitaltek.com.)