As the local stock market enters the 11th year of its bull cycle this 2020, investors must brace for choppy movements and watch out for risks that the bear will overpower the aging bull, according to equities research provider Trading Edge. In a research note from Trading Edge chief investment strategist Ron Albert Acoba and technical analyst Angelique Chua, they said that for about a year now, the Philippine Stock Exchange index (PSEi) was simply moving similar to a tennis match rally, with the near-term support at 7,545 to 7,600 and resistance at 8,150 to 8,216. The inability of the local stock barometer to move forward suggested there was a risk of breaking below the near-term support, the analysts said. The next support levels are seen at 6,800-7,000, the lows seen in 2018 when the upsurge in inflation spooked investors. Trading Edge believes it’s “crucial to stay above this as a break below may mark the start of a prolonged bear wave.”
The analysts noted the last bull run back in the 2000s lasted for five years while the bull run in the 1990s lasted seven years. Today, the PSEi is seen at the late stage of its bull cycle.
“PSEi appears to be in the process of completing a major complex bearish reversal,” the research said.
The analysts said the lower highs seen in the market were pointing to a possible downside. They also noted the PSEi’s negative market breadth—only six out of 30 names in the main basket are on an uptrend and trading above a 200-day moving average, just enough to keep the index afloat.
These are BDO Unibank, ICTSI, JG Summit, Robinsons Land, SM Investments and SM Prime Holdings, which accounted for a combined 44.67-percent weight in the PSEi.
By the third quarter, Trading Edge sees a long-run topping formation, a technical indicator that shows prices may already be peaking. However, they said there could still be another rally, perhaps the last, that could bring the PSEi toward the 8,000 level even after a temporary pullback.
“While there is a threat of a sell down due to geopolitical tensions between the US and Iran, another global rally is still due,” the analysts said, citing the US-China trade deals ahead of the US elections.
Trading Edge sees two scenarios for the PSEi this year.
First, the PSEi is seen to trade within the 7,545 to 7,600 support before reaching a resistance at 8,150 to 8,216.
The second scenario seen is that the PSEi will slip below its one-year support at the 7,545 to 7,600 area and rally against its key support at the 6,800 to 7,000 zone.
Meanwhile, the estimated consensus fundamental target of the PSEi is 8,831.56 as of Jan. 3, according to Bloomberg. Adjusting for the one-year government bond yield of 3.456 percent, Trading Edge recommends taking profit at 8,536.
As foreign funds flow out of the region back to the United States, the choppy, sideways movement is likely to be seen across regional markets. While the US market will extend its uptrend, Trading Edge also sees US stocks at the last stage of its bull cycle.
On the other hand, Trading Edge noted that commodities, more specifically gold, were now in a bull trend, with the conflict in the Middle East seen to further prop up gold and crude prices. The rise in gold “highlights the market’s risk-off mode,” the analysts said.
Trading Edge said the strategy should be to be “neutral on core equity position, tactically range-trade on pullback to key supports, widen time frame for fundamental positions and pick up in tranches.”
On stock picks, the analysts recommended a “long” or buy position on outperformers such as BDO Unibank, ICTSI, JG Summit, Robinsons Land, SM Investments, SM Prime and Wilcon Depot. INQ