Aug 18, 2015 – False Sense of Control

The sell-all, buy-all mentality that most short term traders have ingrained with them is not a good strategy in my opinion.  Unlike other markets where you can actually buy your entire portfolio within a few ticks and no slippages, you cannot do that with the Philippine market.  I’m talking from experience.

A person must realize that while there are plenty of retail traders and investors trading in chaos and panic during a market sell-off, the larger whales who have the most to lose are actually just watching in the sidelines or waiting to pounce if and when the time is ripe.  How do I know this?  Also from experience.  I know this might just seem like an arrogant speech but everybody believes they can time the market.  The truth is that everybody actually only thinks they can.  When the going gets tough, it is only people who have too few shares who can actually get out or get in because volume and price in a thinly traded Philippine equity market is not the same.

I’ll give you a concrete example.

When the markets are rising, liquidity is typically very strong and abundant with volume hitting hundreds of millions giving the illusion that with high value traded, people can exit when they need to.  This is pure gibberish and illusionary.  Just to give you a snapshot, at least a P1B value traded hands for $SBS during the second day of its IPO at prices almost 100% of the IPO price.  It traded even as high as P6.18 for a brief moment with over 75M shares trading hands at levels of P5.60 or above.  Now that the stock is closing at P4.88, the exits are too little.  How do you think could someone who wants to exit 75M shares now get out when volume is trading at only 14M shares or P80M?  That means that despite that price decline, we have almost 100M shares that haven’t left the exits.  That’s an impending doom should they all suddenly wish to exit at any price level.  I’m just explaining how a herd mentality of strong price action can also quickly come crashing down (though this really depends on whether the stock can indeed be controlled with its little float but with 100m shares caught at the high end, it’s little thinking to see that the probabilities are going to be a volatile and turbulent scenario for the people with drawdowns and not yet exiting.)

Now consider this in a different scale as well, just recently, a lot of people couldn’t believe that a singular news snippet could trigger a 68% rise in a singular month (although it was simply speculation as the fact wasn’t real with most casinos falling hard with their earnings all disappointing.)  The point too is that when it fell at P4.88, the volume trading there was hardly climactic.  In fact, most volume of shares traded at the top end of the range.  The first 10% move was quickly snapped and eaten up by the early buyers.  With everyone optimistic, share prices aren’t only going to be sold with volume on the lower end such that it precipitates a fast recovery.  Think about the USDPHP.  The scramble for dollars at higher prices is a snapback effect.  Breakouts happen usually at higher levels as well as breakdowns.  The person claiming to have bought at the low and selling at the top is pure gibberish (especially when we’re talking about large sums of money which is often what professional traders handle – at least P10M.)

Do you believe that any professional manager will strictly trade based on technicals?  Through experience?  My answer there is no and this might come either as arrogant or what but I’m going to tell you that from experience, theories will not apply in the Philippine market.

This is a lesson I’ve learned during year 2011.  $AGI fell without a company specific reason but because it had been distributed and affected by the 2011 PIIGS dilemma, from 13 it traded to 8.  Many people have seen the distribution and sold 13s and 12s only to buy back at 9-10 but in one day, I distinctly remember that day when $AGI sank to 8.  It was also this day when $PSEI went to 3800.  There was no such thing as support in the index so people were just selling with market prices and no perceived support levels.  That any stock can fall 10% within one day would really just about happen to every stock trading in the market.  I remember all technicians sighing a relief of evading that one day dilemma but while they all evaded the drop, neither were they able to participate in a huge snapback rally.  After a breakdown of all signs of support, how would you expect that $PSEI goes from 3800 to 6000 without any correction?

By the way, $AGI went from 8 to 13 in just a month.  Also there was a slight correction then proceeded to 22, consolidating again and then rising before the distribution again.  Lemme show you the entire picture.

agi snapbacks

relentless boom

*****

Also from experience, when I hear people calling me and telling me to sell all without any care for prices, I distinctly remember one other day when $PSEI also hit 5,562.  During that day, when $MEG broke 3, it fell to 2.88 , $AC fell 10% to 388 and most people were sighing a relief but I somehow knew that while people weren’t thinking about prices and were just happy to unload without thinking, I could also sense that I’ve seen that market reaction repeated a lot of times and the people doing so are acting in a panic rush to the exits.

By no means is this attitude wrong, but from what I know, when everyone thinks that the only direction for the market to go is decidedly down, something always isn’t going to be.  That’s just how the market goes, whether its an overcrowded fundamental trade or an overcrowded hyped trade or even an overcrowded short position in the market.

They say in life, if everyone has already bought and is overly bullish, then no one is left to buy higher hence market will drop.  In this case, when everyone’s so dead sure about $PSEI falling into a cliff, I know that “everyone” is time and time again, not going to be true because for one, when the entire baby and the bathwater and the kitchen sink with the knives are all thrown into bits as if the carrots, apples, oranges and bananas are just the same, we have asymmetric opportunities.

Some people will realign their portfolios into which companies didn’t deserve the selloff and will bounce back

Some people will switch their losers which will never bounce back in a million years.  Let’s face it.  Some are doggone forever.  They’re cyclical and will never be back in a million lifetimes.

Some people will choose to do nothing and just treat time as an ally (assuming of course they chose business models that could last any downturn.)

This by no means discounts that technicals, flows are meaningless.  On Contraire, they’re important.  But with fresh breakdowns come fast moves.  Check history as a guide and you’ll see volatility and choppiness.  It never is a one way street.

The downtrend may be intact with resistances everywhere, but justifying that all companies (good or bad) are to be thrown away is a debatable game especially when astute value investors like Guy Spiers will tell you time and again that a rational mind armed with cash and position size will make some portfolios battle out a decidedly harsh market.

So will the Philippines avert an EM contagion?  Of course not.  Wouldn’t cash be the best hiding place?  Well, that’s true but that’s also if you can completely time every whistle and drizzle that the market will give every day.

Usually, I notice people will tend to over-trade and end up cutting, buying back, cutting, buying back resulting into the false sense of “control” and an entirely commission-draining whipsawing exercise.

Well that’s me.

People have a false sense of control.

Tomorrow or the next week, the market can gyrate 300 to 500 points in the downside or the upside.  What you choose to do is to be not certain of either event.

*****

– Faceless Trader

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