[ANALYSIS] Winning the trade even before starting it

We are now on the 8^th week of the trading year. 

For my first column (this time for Rappler) after going into an extended voluntary lockdown more than three years ago due to the COVID-19, I would like to start with what legendary stock traders call the first dictum in stock trading of “winning the trade even before starting it.”  

To begin with, the market ended again last week at 6,779.02 of the PSEi, down 97.71 points or 1.42% for the week but still up 212.63 points or 3.24% on a year-to-date (YTD) basis, or from the first day of the year through the current date.  

The weekly fall had actually begun on the 4^th week when market weakness set in because of persistent discouraging economic news.  

A major factor blamed for the market’s weakness was rising inflation. Investors know fully well that inflation normally fuel higher interest rates. And higher interest rates affect business profitability.  With lower profitability, stock prices fall. Thus, inflation has an adverse impact on the stock market. 

Rising food prices, transport fares and wages were among the factors attributed to the current rising trend of inflation that on February 16, on the Monetary Board’s (MB) first meeting for the year, it decided to increase the key interest rate by another 0.5 basis point (ppt) to 6% from 5.5%.  

Adding fuel to the fire, so to speak, the market was further spooked by what MB chairperson and Bangko Sentral Governor Felipe Medalla said in his February 17 interview with the international television network CNBC wherein he admitted that raising the policy rate “may be unavoidable” in the two or three more upcoming meetings the MB will have this year. Remember that Philippine inflation rose to 8.7% in January, said to be the country’s fastest since November 2008. The next policy review is scheduled for March 23.

Early year momentum

Going back to the market’s YTD net advance as of the end of the 7^th week, this was but the momentum built from of the optimism of local investors – especially every start of the year.  In addition, this is a national attribute shared by most of us, which could be both bad and good in trading the market.  

This is good because this attribute can power one to ultimately win and beat the market in the face of a seemingly unending string of losses. Bad, because this can lead one to over-confidence, that may result in doing unrealistic decisions.

By no means, the geopolitical tensions and market uncertainties happening elsewhere in the world, most especially in the region, cannot be discounted to significantly affect the market, for as they may appear distant factors for now, they can radically drive down the market at an instant.

On the observation that it is local investors’ optimism and participation that is propelling the market higher, the results of trading on the 2^nd week of the year are a good example. Foreign investors trading activities only accounted for 31.30% of total market value turnover over a YTD market participation of 32.68%. The weekly market value turnover was extraordinarily high at P10.37 billion compared to the market’s YTD figure of P8.26 billion.

This is further corroborated by the trading results of the 7^th week. Foreign investors’ market participation rose to 37.29%. They also ended as net buyers. Yet, despite these developments, trading still ended down for the week with a net loss of 97.77 points or down 1.42%.

With the specter of more projected rate increases here at home and abroad, particularly the US, in which the US Federal Reserve has expressed fear that rates may still rise by another 75 basis points till the end of 2023, market weakness may continue to linger. 

The dictum of “winning the trade even before starting it” originated from the observation of how lions in the wilds stalk their prey for a successful kill. As observed, they stay hidden in the grass. They let their prey come close. They also make a stealthy and slow movement towards the prey. And, after getting close to a “cashable distance,” lions make a quick charge upon the prey.   

What all this rhetoric means and how it is done into trading performance, you will read it in the succeeding articles of this column. Don’t miss it. It comes out every Friday. – Rappler.com  

A veteran stocks columnist, Den Somera is a licensed stockbroker. His columns must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. The public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. You may reach him at densomera@yahoo.com