Stocks: The big picture

For those of us in the investment world, “So what did the market do today?” is almost the standard greeting.

When we speak about the “market,” what we are talking about is the major stock index known in the Philippines as the PSEi. The PSEi is composed of 30 companies, selected with the idea that the trading of these shares reflects the overall tone and direction of the broad stock market.

Although no investor actually buys the index through owning the shares of all the companies that are included in the index, it is critically important to individual investors that they watch and understand the movement of the PSEi.

There is an old saying that an investor cannot “fight the tape.” That is, no matter how good the company that you are buying is, the overwhelming probability is that the share price of that company will not move contrary to the overall trading action of the broad market as embodied in a stock index like the PSEi.

Investors virtually always lose when buying stocks during a declining broad market. There is a statistical measurement we use to correlate the movement of the individual share price against the movement of the broad market. There are some stocks that move directly 1:1 with the index and others that are less influenced by broad market action.

However, ordinarily, a company’s shares move in tandem, although not always at the same rate but nearly always in the same direction as the general market. Understanding how the index moves is crucial to choosing whether to invest or not and when to invest.

For example, someone asked me yesterday whether Megaworld could still be bought above P3 per share.

My answer is a strong “yes.” Earnings are good for Megaworld. The stock is still selling at a favorable Price Earnings Ratio. I like the projects that they currently are building. Sales are growing. They have allocated a substantial amount of their capital expenditure budget for the development of projects in areas that I believe will bring great rewards to the company.

My last comment, though, is that I think that the PSEi will make a move from its current level of around 3,400 to 3,300.

You might ask why. If the company’s fundamental business position is so good in my estimate, why would I even need to consider the general stock market? You cannot fight the tape. Buying the shares of a company without considering the complete context of the broad market is a great way to lose money.

The PSEi index is clearly in an upward track. The longer-term trend targets the 4,000 level and beyond. However, there is major resistance, meaning a reluctance of buyers to buy at this price, at 3,400. The PSEi at 3,400 equates with Megaworld at around P3.40.

Therefore, buying Megaworld at P3.30 or higher means that you expect the PSEi to move above 3,400 in order for you to make a profit. Even though over the longer term you may be absolutely correct that the market and Megaworld will move substantially higher, in the short term you may not be maximizing your profit potential.

My analysis at this point is that the PSEi is going to move down to the 3,300 level before it again attempts to breach the 3,400 resistance. Without going into too much detail, there is a technical “gap” that needs filling between 3,304 and 3,331. Therefore, I think the market will lose 80 points or so before climbing higher on a medium-term basis.

What then would be the sensible strategy in purchasing shares of Megaworld or anything else for that matter?

Wait for the market to move down to 3,300. If the market goes to 3,330, theoretically, your favorite stock will be selling at a lower price. If the market proceeds upward, more profits in your pocket.

If the market decides to go down further, you are in at a lower price, thereby risking less of a loss.

If you postpone your purchase for the time being, you risk only a small opportunity loss if the market fails to move down to 3,300 and decides to break through the 3,400 tomorrow, for example.

Trading in the stock market is all about two things: maximizing profit opportunities and minimizing loss possibilities. The “tape” or the PSEi can be your best friend and adviser in achieving those two goals. 

E-mail comments to mangun@email.com.

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For those of us in the investment world, “So what did the market do today?” is almost the standard greeting.

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