Investment strategies

Over the weekend, I got a call from a friend who plays the local market, as well as trade on Wall Street, extending his waking hours.

In our conversation, what I previously called the “consistently predictable but not really that consistently predictable behavior” of the market over events that threatened to break the fragile global financial order has now blurred his view on the market and his investment strategies.

For months now, movements in equity markets like ours have been driven almost exclusively by the actual progress on the recovery of the US economy and the crisis affecting the European financial system. For having been exposed to these events for so long, people like my friend have been flummoxed.

I was confused myself by the swings of these events. I could no longer anticipate how the market would react to these developments. At times, the market would choose to give more importance to positive signs on the progress of the US economy over supposedly deteriorating developments affecting the euro zone. Then there were instances when the market would disregard positive signs about the US economy in favor of inconclusive measures agreed upon by nations trying to control the debt problem in Europe.

If you look at the last 18 months, these factors not only affected the volatility of stock prices, but that of commodities as well. Reaction to these major events has, in turn, affected prospects of other economies.

The way these events have affected the prices of stocks and commodities, as well as the prospects of economies, will there be a market rally if more positive signs are found on the actual state of the US economy along with news that the eurozone crises is put to a “descent closure”?

After a lengthy conversation over this question with my friend, he was confounded by what he learned as the stand of some foreign analysts. According to the report he read, Wall Street’s S&P 500 index may rally all the way up to 1,447.93. This bothered him for he found it too good to be true. Last Friday, the S&P 500 index stood at 1,263.85. Following the report, this means that Wall Street’s second major index will advance by a hefty 14.56 percent. This sounded too radical. But it seemed to be happening, for our market, and that of Wall Street, rallied strong last week.

A market rally is a sustained upward movement of prices that “can happen either during a bull or bear market.”

A bull market is a time of rising market prices propelled by “optimism, investor confidence and expectations that strong results will continue.” A bear market is a period of “declining prices,” with prices “usually falling by 20 percent or more.”

These terms are metaphors used to describe the state of the market. They are based on how the animals attack. The bull thrust its horns upwards, signifying a market on the rise. A bear swipes down its paws, suggesting a market on the downtrend.

“The length or magnitude of a rally depends on the depth of buyers along with the amount of selling pressure they face. For example, if there is a large pool of buyers but few investors willing to sell, there is likely to be a large rally. If, however, the same large pool of buyers is matched by a similar amount of sellers, the rally is likely to be short and the price movement minimal.”

Mulling over the state of the market, together with my previous studies on how low and how high the market has traveled in the last 52 weeks, my friend and I found the run-up last week strong enough to produce a radical performance.

Two weeks ago, the market was only about 6 percent away from its record high. It further rose last week but was prevented from going beyond the record high. Nevertheless, it remained relatively high to be in striking distance to the record high.

Market transactions this week are, therefore, material. The amount of money that will pour in could make the difference if we expect a forecast like what Wall Street analysts have for the S&P 500.

What’s encouraging and supportive of this radical view is that foreign buying continued to overshadow foreign selling figures.

In the meantime, we agreed to take a more cautious stance. We will “trade the range” but will be quick to shift to “trade long” on further market confirmations.

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