Market Rider: Bottom-up method

After a full week of trading, it is still difficult to picture how the market will do this year. The market’s trading range had been confined to a narrow price channel as it moved sideways during the week.

The market was up 94.43 points, or 1.6 percent, at 5,984.26 on Jan. 2. It dropped the next day by 36.33 points, or 0.61 percent, to 5,947.93. It was slightly higher at 5,985.81 last Monday, gaining 0.64 percent, but lost 38.37 points, or 0.64 percent, on Tuesday to 5,947.44.

On Wednesday, it recovered by 39.04 points to 5,986.48, and, as if programmed to perform sequentially, the market again pulled back on Thursday by 0.82 percent to 5,937.51. On Friday, the sequence was broken as the market declined, ending with a trading loss of 1.59 percent at 5,842.88.

Bearish but bullish forecast

As to the market outlook for the year, there was this scenario drawn by respondents in an informal survey I conducted the other weekend which was similar to what a recent US financial report described as a “bearish of a bullish forecast” on Wall Street.

The forecast maintains that “2014 will be strong for both the (US) economy and the stock market.” But the market, as a whole, will not go any higher from where it is now.

The US economy, the report says, is “normalizing.” Due to this, companies will make “normal earnings.” In turn, the market will return to normal valuations that “may not look much different than it does now.”

The report also pointed out that the market would go into normal volatility, which could go beyond what was seen in 2013.

When this happens, the report added, Wall Street’s major indices would go beyond recent highs. They will not fly far beyond but will be “just a shade above current levels.”

My market scenario is slightly different. Our local market will move within a narrow channel between present levels and previous highs. It will, however, remain active given the following: The country’s economic fundamentals are intact and more big-ticket development programs are now being rolled out.

But all this will make the country grow by only 6.8 percent—a bit lower than the estimated growth this year of 7 percent. This will, nevertheless, remain the region’s second-best for 2014, next to China’s projected growth rate of 7.2 percent.

These will change if earnings will increase and proportionately lower asset valuations. The attractiveness of the new asset valuations, however, will be compared to those of competing investment centers like the United States and nearby regional equity markets.

We may see sporadic stock rallies and market plays from companies that will top competition in their markets, those that will make a turnaround, or from those in sectors that will benefit from recently rolled out development and productivity programs.

Market great

Peter Lynch is one of the legendary market greats I’ve written about.  Aside from his investing successes, he is one of those who believed that “making money in stock trading does not mean knowing the secrets of forecasting future prices” for, as he put it, “it’s almost impossible to predict the stock market.”

He is also one of those who noticed that the general investing public “tended to be pessimistic and optimistic at precisely the wrong times.”  They have a self-defeating characteristic that prevents them from investing in good markets and getting out of bad ones. Their “luck,” is confined mostly to a market on the advance.

This is why he practiced the bottom-up method of investing except in some few instances where he would rely on economic data and market cycles.

With this method, he said he was able to enhance his chances of earning more from his investments. It also made it easier for him to figure out when to buy or sell. As he explained, “If you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say goodbye to it.”

Lynch has what he called “the two-minute drill.” The exercise concentrates on studying the earnings record and potential profitability of the company along with understanding the nature, size and quality of its assets to better appreciate its intrinsic value.

To further capture the inherent values of stocks, he says, one must know what it is. He says there are six types of stocks: slow growers, stalwarts, cyclical, fast growers, turnarounds and asset plays.”

Bottom-line spin

The market may continue to slide due to poor market sentiments in the US.   Rotterdam Week, the opinion page of Rotterdam-based international consultancy Atlantico Business Development, came up with a list of “The World’s 15 Best Countries for Business in 2014.” The criteria used for the selection were: well governed, stable and mostly democratic free economy, market-friendly and economic growth.

For these countries to be selected, they should “have a reasonable market size, a growing middle class and a generally reasonable GDP per capita, and strategic location for investments or exports.”

Rotterdam Week listed the Philippines as one of the 15 best countries for business in 2014.

(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)