Blood on the streets

This may sound too alarming, if not outrageous. But with the way the world’s equities markets behaved again recently as they were buffeted by the very same negative leads that had driven the markets to head south or north for so long, some market observers are suggesting that we may soon see “blood on the streets.”

For instance, the Dow Jones industrial average (DJIA) index has practically given up all that it gained in the past five months of the year. Records showed that on January 3, the DJIA was at 12,397.38. When trading closed for the day on May 31, the DJIA settled at 12,393.45.

As a result, the DJIA has fallen and lost not just all what it has gained since the start of the year, it gave up an additional 3.83 points of previous gains in the past—a sign that the DJIA has fallen past its current comfort limit.

If the net loss looks too small to be significant, the danger is made real by the fact that the fall and the present danger of falling deeper can be seen by the way the fall happened. It happened so quickly and suddenly in so short a time. It happened in a matter of days. On May 1, the DJIA was recorded to have settled at 13,279.32. (This made the DJIA 882 points higher from where it was last January 3.) But when the market closed for trading on May 31 at 12,393.45, the DJIA has already plummeted by no less than 885.87 points, or 6.67 percent.

The S&P 500, likewise, apparently seemed to have followed a similar fate. On May 1, it was recorded to have settled at 1,405.82. But by the end of trading on May 31, it has gone down 95.49 points, or 7.29 percent, lower at 1,310.33.

Because our market has traditionally tracked Wall Street’s movements, the same market observers now claim that we may soon see “blood on the streets” in our market, too.

PSEi’s trend

Upon cursory review, this distressing thought appears not too farfetched. The Philippine Stock Exchange index (PSEi) has fallen and continues to fall, too, as of the end of trading last week.

In particular, when the market closed for trading on May 31 at 5,091.23, the PSEi had slipped lower by 137.61 points, or 2.63 percent, from the closing index of May 2 at 5,228.84. All such losses were similarly incurred by the PSEi in the same fashion as how the DJIA lost all of its gains in the last five months. It incurred all said losses in the month of May.

The picture of having a desperate market situation similar to what these market observers are suggesting, however, changes when you take a look at the record of the PSEi all the way back to January 2. The PSEi was then at 4,397.08. At the end of trading of May 31, the PSEi was still ahead by 694.15 points, or 15.1 percent, despite the 137.61-point loss it incurred in the month of May.

In addition, looking at the weekly performance of the PSEi, the market was up in three out of five weeks in May. More than that, the PSEi has been climbing in the last two weeks of the month, unlike the DJIA. With these observations, while our market has drifted lower at the end of May, the fear that we may soon see “blood on the streets” in our market is more remote than real.

A second look at the performance of Wall Street’s two major indices in the past five months may provide further support and credence, following the observation that our market has been historically tracking Wall Street’s trend and direction then and now.

Second look

Thus, looking more closely at the DJIA’s performance record along with that of the S&P 500 in the last five months, what happened to the DJIA in May could be what is technically called a correction arising from its secondary movement. As described by Charles Dow, refined by William Hamilton and further propounded by Robert Rhea, secondary movements are historically observed to occur faster and sharper, as how the DJIA did in May. Also, while the DJIA perilously slipped in May to lose all its gains in the past five months, the S&P 500 remained on the advance with a gain of 73.27 points, or 5.59 percent.

In 2011, the S&P 500 also had a similar pattern of performance. By the end of May 31, 2011, the S&P 500 stood at 1,345.20. Compared to where it was on May 2, 2011, it was down 60.62 points. But when you measure the S&P 500’s performance from the beginning of the year on Jan. 3, 2011, it was still up by 73.27 points after five months. This is almost equivalent to the S&P 500’s total advance of 73.37 points for the first five months of this year.

More importantly, while the DJIA remains to be a very applicable market barometer, the S&P 500 is fast becoming the more practical measure of Wall Street investors’ actual outlook and attitude. The S&P 500 is said to better capture all that is affecting the market. In other words, the behavior of the S&P 500 better reflects—as what they called—the “sum total of all hopes, fears and expectations of all market participants.”

Like the DJIA, the S&P 500 discounts all “interest movements, earnings expectations, revenue projections, (the impact of) presidential elections, product initiatives and all else into the market.”

Considering these additional findings, I’m inclined to conclude that the DJIA’s sudden and sharp fall in May could just, therefore, be an aberration of its primary trend in the last five months.

Bottom-line spin

Convinced by the foregoing observations, I agree that the PSEi’s direction and movement has been the same as that of the S&P 500 in the past five months, where the latter is said to represent the actual sentiments and attitude of investors and that of the primary direction and trend of the market. Both incurred all of their losses in the month of May like the DJIA. But they differ with the latter, for they have managed to keep much of their gains of the last five months, which means that the market’s actual primary trend remains intact.

This being the case, I suggest that you keep a close watch on your favorite stocks. More precisely, stocks with growth storylines.

The market has gone down so much. And while there is no doubt that the two major factors—namely the state of the US economy and the raging credit crises in the eurozone—will continue to hang on the balance for quite some time, these two factors will cancel out each other’s negative and positive impacts on the equities markets, including ours.

I feel that it will not be long before our market may experience a rally that will support its primary trend. So, prepare to re-enter the market or “increase your bets” anytime soon.

(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.)