September 7, 2011- A Little Common Cents Corner #10 – Measuring Market Strength (or Non Strength) .

“The human mind often requires an explanation for stock market behavior.  It will invent causal relationships where they do not exist.  This mental tendency is something for the technical analyst to be careful of and is the primary reason that concentration should always be focused on price action, rather than on speculating on what might or might not be the cause for its behavior.”  

– Charles KirkPatrick and Julie Dahlquist, “Technical Analysis: The Complete Resource for Financial Markets” , Chapter 9. 

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I try to make my analysis of the Philippine index, as general and as encompassing of all major markets as much as possible in order to provide value and objective analysis to my readers.  Faceless Traders’ analyses are personal, independent and it is free.  I make my work the best I can.  If you like my trading posts enough, kindly share my analyses to your circles. 

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don’t settle.” – Steve Jobs [Stanford commencement speech, June 2005

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Let’s begin.

I think that in order to analyze the Philippine markets more objectively, one has to measure market strength/non strength.  Because most of my readers are not necessarily technicians, let me define what I mean.

Market breadth is a measure of how widely a market move is spread throughout the stock market.  In other words, measuring breadth tells the analyst whether an increase in the market index is characterized by a large increase in the price of a few stocks or a smaller increase in the price of majority of the market stocks.

Is the typical stock moving the same way as the index?  if so, then market direction is confirmed by the internals. (Rising tide lifts all boats).  It not, the internals and the index are diverging, indicating internal strength is changing.  

Look at stocks trading new highs or new lows.  How many stocks seem to be moving in the same direction as the market index?

Understanding the market internals allows us to predict whether the market trend will continue in the direction that it has been.  

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Philippine Context Clues:

Figure 1: Top 20 Most Actively Traded (Values)

Last Updated As of September 7, 2011 (Wednesday)

# Stk Code Last Change High Low Open Volume Value
1 LC 1.3300 -0.1700 1.5100 1.3200 1.4700 746,387,000 1,042,250,980
2 AC 306.0000 -0.4000 307.0000 305.6000 305.6000 1,239,530 379,401,644
3 TEL 2,420.0000 38.0000 2,428.0000 2,410.0000 2,410.0000 142,855 345,697,440
4 FGEN 14.4800 0.3600 14.7000 14.1800 14.2000 22,104,300 318,841,304
5 BHI 0.4400 -0.0500 0.5300 0.4400 0.5300 632,160,000 305,049,750
6 ICT 50.7500 0.6000 51.5000 50.7000 50.7000 4,975,070 253,349,467
7 AP 30.4500 0.5500 30.6000 29.9500 30.0000 6,155,700 187,585,905
8 MBT 70.5000 0.0500 72.0000 70.5000 70.5500 2,606,090 184,136,539
9 LCB 1.4600 -0.1500 1.6000 1.4400 1.5700 120,968,000 181,804,670
10 SMC 120.8000 0.8000 122.5000 120.5000 120.5000 1,006,170 121,890,868
11 MA 0.0680 -0.0030 0.0720 0.0650 0.0710 1,765,510,000 119,784,670
12 AT 19.3000 0.1000 19.4800 19.2800 19.3000 6,164,600 118,988,524
13 DMC 39.9000 -0.0500 40.2000 39.9000 40.1000 2,745,100 109,708,535
14 BPI 57.5000 0.7000 58.0000 57.3500 58.0000 1,828,180 105,287,477
15 EDC 6.0800 -0.0200 6.1200 6.0500 6.0600 15,558,900 94,804,068
16 GLO 900.0000 20.0000 900.0000 880.0000 880.0000 104,410 92,728,705
17 ALI 15.9400 0.1200 16.0000 15.8400 15.8400 5,541,200 88,335,402
18 SM 546.0000 -4.0000 549.0000 545.0000 549.0000 151,930 83,089,755
19 PX 27.6000 0.1500 27.9000 27.1000 27.5000 2,718,600 74,913,450
20 VLL 3.1900 -0.0500 3.2600 3.1600 3.2500 21,533,000 68,807,950

 

Philippines is a small market.  Out of the value traded of 5.45 Bil pesos for September 7, the top 20 most actively traded already comprise 80% of all transacted value for the day. (See Figure 1)  The implication for traders is that you’re not missing anything much, if all you’re doing is just watching these 20 stocks, and not minding the rest.  (We currently have 181 stocks listed in Philippine markets.  This is a luxury of Philippine traders, unlike other markets where the total value traded in the index is smaller than 40% to represent what the market is actually doing).

What’s most astounding perhaps is that out of that 80% of all transacted value, today’s market action is dominated only by one stock- LC/LCB.  Combined traded value of LC/Bis 22.22% of total traded value of the whole market.  So, although LC/B is not even included in our index (a stupid rule of the PSE), every technician is aware that whatever happens to this stock dictates the fate of all the rest of the market.  Amazing, I know.

Of course, BHI is also worthy enough to mention in itself, deserving of a post too both on the ascent and the emotional rollercoaster it is giving traders in this stock.

I shall not talk about the amazing statistics of LC/B, and the MA/B. I’m not the first to say how thankful all the brokers are for the volatility and liquidity giving huge commission profits for all security brokerage firms.  Mr. Valentino Sy of Phil Equity wrote a very good post re the stock in his column already here.

What I’d talk about are the following things:

1.) Three Excess of 10 pct Down days in LC/B– were met with huge volumes.  (Aug. 25, 2011, Sept 1, 2011 and Sept. 7, 2011 )

Normally declines as large as these, from 1.80 to 1.33(last close) find exhaustion gaps.  If most traders are normally just aware of exhaustion gaps to the upside, there’s also what we call an exhaustion gap in the downside (when all the selling has been served).  Unfortunately, I find exhaustion still to correct deeper, with more sell-offs looming ahead, even if US markets or regional markets cheerily advance.

Perhaps, I’m understating huge volumes because every single day of trading in LC/B has averaged more than 500 Mil every single trading day for the past 2 weeks.  (See Figure 2)

If you’re not even convinced that LC/B is short term in a distribution stage, I don’t know what metric you’re using as a reason to “hold” your shares, except for some fundamental reason.

Figure 2: Historical Traded Value of LC/B (Courtesy of Philippine Stock Exchange) :

DATE OPEN HIGH LOW CLOSE AVERAGE VOLUME VALUE
07-Sep-2011 1.47 1.51 1.32 1.33 1.40 746,387,000 1,042,250,980.00
06-Sep-2011 1.56 1.61 1.45 1.50 1.54 466,028,000 716,916,810.00
05-Sep-2011 1.51 1.57 1.48 1.54 1.53 456,951,000 698,972,440.00
02-Sep-2011 1.48 1.52 1.41 1.47 1.45 510,995,000 742,298,450.00
01-Sep-2011 1.61 1.61 1.46 1.48 1.51 448,384,000 675,600,740.00
31-Aug-2011 1.63 1.66 1.59 1.61 1.63 240,636,000 391,546,560.00
26-Aug-2011 1.61 1.67 1.54 1.58 1.60 591,180,000 945,797,960.00
25-Aug-2011 1.70 1.77 1.60 1.61 1.67 1,035,443,000 1,730,978,300.00
24-Aug-2011 1.76 1.82 1.70 1.79 1.77 457,295,000 808,002,100.00
23-Aug-2011 1.70 1.77 1.69 1.77 1.74 512,841,000 892,684,740.00
22-Aug-2011 1.55 1.65 1.51 1.65 1.59 338,742,000 538,262,930.00
19-Aug-2011 1.53 1.58 1.51 1.54 1.54 305,762,000 470,864,460.00
18-Aug-2011 1.45 1.55 1.40 1.54 1.49 475,317,000 708,542,960.00
17-Aug-2011 1.50 1.52 1.44 1.44 1.47 412,418,000 604,871,450.00
16-Aug-2011 1.53 1.57 1.49 1.50 1.52 351,200,000 534,080,070.00
15-Aug-2011 1.48 1.53 1.48 1.51 1.51 394,765,000 594,712,090.00
12-Aug-2011 1.39 1.46 1.39 1.46 1.44 411,766,000 591,424,930.00
11-Aug-2011 1.25 1.39 1.24 1.36 1.35 491,229,000 661,727,190.00
10-Aug-2011 1.27 1.29 1.23 1.28 1.26 351,957,000 444,401,100.00
09-Aug-2011 1.22 1.23 1.17 1.20 1.20 363,469,000 435,180,080.00
08-Aug-2011 1.27 1.28 1.22 1.25 1.26 227,683,000 285,980,320.00
05-Aug-2011 1.24 1.31 1.21 1.27 1.26 597,648,000 753,093,010.00
04-Aug-2011 1.23 1.33 1.22 1.32 1.30 375,519,000 486,379,480.00
03-Aug-2011 1.20 1.24 1.19 1.22 1.22 240,614,000 292,646,540.00
02-Aug-2011 1.18 1.20 1.16 1.20 1.19 132,642,000 157,257,860.00
01-Aug-2011 1.14 1.18 1.14 1.18 1.17 136,078,000 158,601,130.00

2.) Public Market Sentiment is Bullish, hence be Bearish – In a small anecdote with my friends who are traders as well, the fact that everyone in the market is not even trying to cut their losses or taking their profits out (if they’ve averaged up, bargain hunted etc) , is a bearish indicator to me.  I keep on seeing a lot of “Hold”, “Average Down”! in several finance market forums in the Philippines.

Guys, if you’re a trader. LC/B is a heavily “ipit” stock right now.  If you’re one caught in the upper frays with costs ranging above 1.40-1.50s, either you’re one hell of an investor (to which I’m not), and good luck to you.

Everyone’s still holding their shares, averaging down their prices and are bullish on gold prospects.  While I can understand a possible EIP (dollar cost averaging play for this strongly trending stock is still in place) , you have to understand there are huge volatilities in this stock. 10-15 cents is the new average true range of this stock.

The new 1.40-1.60 range is perhaps going to be a 1.20-1.40.  With so many market pundits calling 1.20 , you may see an excess breakdown from those numbers.  I know traders love volatility, well… you can opt to be sidelines or catch knives. Knives hurt. 

3.) Staying out is an interesting thing to do (even if the US and regional markets are rallying) – If you check our market internals, we have been advancing but only limited to a few stocks.  The market breadth has not been advancing.  While the averages are reaching higher prices,  a “negative divergence” is occurring.  This signals weak market internals and that the market uptrend is in a late phase and may soon end.  Note though that a breadth divergence is not necessary for a market peak.

Price Action is enough.  Massive downside volume is enough to stay out.  Hope is not a place in the markets.  Distributions take time.  It will go up and down, up and down, perhaps a trader can make 5-10 cents in the right direction if he’s able to guess the right levels.  It’s going to be an emotional trading range.  Adapt or die.  Honestly it’s just the brokerage firms happy about this. Seriously.

– The Faceless Trader

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5 Responses to September 7, 2011- A Little Common Cents Corner #10 – Measuring Market Strength (or Non Strength) .

  1. coby says:

    very informative stuff, sir/mam faceless trader. i’m glad to read all your inputs today to have a better grasp of the market and to always remind myself to follow my trading plan. i’ve always been your follower and i am learning a lot from you. rest assured i will post this on my FB wall to inform small investors/traders like me. this is my way of showing my gratitude to you by sharing this learning to others. thanks! great morning!

    Like

  2. roiking says:

    Nice analysis!

    Like

  3. Harry says:

    Sir FT, regarding “2.) Public Market Sentiment is Bullish, hence be Bearish”.

    If they are bullish, then how come retail traders (COL) already sold a lot during the downtrend? COL is usually in the top 3 sellers the past two weeks, after the big fundies. I believe they were bullish on the way up, now they are bearish on the way down.

    You said: “I keep on seeing a lot of “Hold”, “Average Down”! in several finance market forums in the Philippines.”

    I don’t think the forums are an accurate way to measure if they hold or sold. Humans don’t actually brag about cutting losses as their usernames would be branded in the forum as a ‘loser”.

    Just my thoughts 🙂

    Like

    • well– it would be better to really quantifiably measure it, but for now, there’s not much avenue except reading forums ( a crude measure, I know— and leaves a lot of errors as u have covered the fact that most people will never really write the fact that they already cut or sold their positions).

      As for retail traders–such as COL selling a lot during the downtrend. I checked the broker transactions and yes, COL does happen to be a net seller.
      If you modify the historical broker transactions (filter using sell volume, and use dates August 25, 2011- Sept 9, 2011)- You’ll get COL as net seller of aroudn 100Mil shares at prices of 1.50 areas.

      This though…is something that cannot be used as a legitimate analysis of saying that COL is a net seller…because if you check (yearly possible accumulated shares of COL clients)

      the amount roughly ends up with about 140 Mil shares still held (net buyer)—- transaction date covered july 23, 2010 to sept 9, 2011

      truth is.. we cannot exactly glean what retail traders are doing, nor can we assume that COL LC transactions comprises only of retail traders, as there are perhaps some large retail traders that can sometimes even be comparable with the big fundies in terms of management holdings.

      well..its just hard to really pinpoint and quantify, and worry about these statistics as its not really as accurate nor coming from a position that’s really valid.
      im not really recommending any action re LC. All analysis I make is just how I think. In the end, it’s up to you to decide.

      -FT

      Like

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