Market Rider: Out of the woods or not just yet

There is this impression that even if the market ended in positive territory at the close of trading in September, it was still another bad month.

In some way, this impression may have some basis. The market was on a rebound at the start of September. It made a weekly gain of 5.13 points, or 0.1 percent, by the end of the first week as the market closed at 5,201.32. This was followed by a whooping gain of 121.15 points, or 2.33 percent, in the second week as the market climbed to 5,322.47. The market’s trend, however, took a downturn in the third week. It fell back to 5,292.06, incurring a weekly loss of 30.41 points, or 0.57 percent. As per last week’s trading results, the market was able to climb by only 54.04 points, or 1.02 percent, from the previous week’s close as the market rested at 5,346.10.

With this weekly performance of the market for the month of September, it could certainly give the impression that it was still a bad month: It failed to follow up on its advance in the first and second week by losing it all, and losing more, in third week, while it ended the fourth week with a gain that was not enough to become a basis of a clear conclusion.

Similar situation

In the United States, a similar situation exists. In the consciousness of many, the US market was not just a bad month but “the worst of the year.” A detailed review by a financial publication says otherwise. In September, according to the publication, the Dow Jones industrial average (DJIA) was up 3 percent, the S&P 500 rose 2.9 percent, the Nasdaq gained 2.3 percent, the Russell 200 jumped 3.9 percent with the Dow transport up 1.3 percent.

So what made the US market also look that bad in September? Based on the review, the US market looked only that bad because it always reacted in parallel with the Fed’s pronouncements on the state of the American economy together with the “continued worries over (the financial status of) Europe,” the two factors that mainly influenced stock movements. As revealed, these two factors were also responsible for the net gains of the US market. This meant that market gains were more significant than losses in reaction over these two factors. For instance, the S&P 500 rose significantly when the European Central Bank (ECB) initiated an extensive bond-buying to reinforce the financial structure of concerned failing countries. This was followed by another significant advance as a result of “the Fed’s market committee report,” which happened sometime in the middle of September. Likewise, the S&P 500 fell—but slightly lower—“on worries that the riots in Spain might derail the careful choreography of a Spanish bailout” in the latter part of the month.

Thus, withstanding the impression that the US market moved along with the positive and negative swings of these two factors, it did not react in the same degree: The market moved up more when positive and moved down less when negative. As a result, the market in the US was not as bad in September. To quote the conclusion of the report, “September being the ‘worst month of the year’ has not proved fruitful.”

This is how the local market also exactly performed last September. It made more gains when advancing and lost less when retreating. At the close of trading on August 31, the market was at 5,196.19. At the end of the month last Friday, September 30, the market was at 5,346.10. This makes the market not just a few points away but 149.91 points, or 2.88 percent, higher.

Third-quarter results

This conclusion about the market in September may not look as valid as when you extend the review to as far back as July or the whole period of the third quarter. Last Friday was not only the end of the month of September, it was also the end of the third quarter. As you may see, the market was at 5,296.41 when it closed on June 29. By the time it ended on September 30, the market was at 5,346.10. It was 49.69 points, or 0.93 percent, higher only from where it started.

There is more to it. In between those points is a pattern created by the market in its movement in a longer timeline. The result of which is a rounding pattern that found its bottom in August. To be precise, after some hesitation in the month of July, the market finally gave in to fall lower in August. This was also after—as has been pointed in previous articles—the market hit record highs on July 3 and 4. This movement hit bottom—as it actually established a market bottom—on August 24. The market then hit a session’s low of 5,125.54 and an end-of-the-day record low of 5,143.35. This happened after the market slowly slipped in a series of lower lows that eventually formed what could be considered a rounding pattern. By this time, the market was about 182.12 points, or 3.55 percent, lower since the end of July. What happened next was a change in the direction of movement of the market that produces a similar rounding pattern. This time, the market started to head upwards.

At an almost equivalent time frame, the market rose as much. By last Friday, the market was up by as much as 220.56 points, or 4.3 percent, 38.44 points higher from the former level of the saucer pattern.

Some may not see or appreciate what I’m claiming. As said by William Bernstein (author of “The Intelligent Asset Allocator”): “It is human nature to find patterns where there are none and to find skill where luck is a more likely explanation.”

Bottom-line spin

Following some charting principles, the market could be considered already “out of the woods” or, at least, is about to be out of the woods. For one, the market has been moving within the quarter on a rounding bottom pattern creating a saucer formation, a breakout pattern. Second, the former level of the other side of the saucer has been reached and even gone above it by the opposite side as of last Friday.

On the other hand, a saucer pattern is accordingly more accurately created over a longer time frame. This could mean more than one quarter as in the present timeline of the analysis. In addition, for it to surely produce the expected effect, it must be accompanied by a spike in volume. This is where the problem of this forecast lies. So far, market volume has not jumped as in a spike. It has remained steady within the 8 to 10 billion mark.

Thus, while there are some telltale signs that the market could be already “out of the woods” or on the way to a breakout, this may “not just yet” happen for lack of more time or additional confirmatory signs.

(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.)