FOR the Philippine stock market, the year 2014 started on a sour note.
The composite index (Philippine Stock Exchange index) was at a low, having come down from its historic high near 7,400 in the middle of 2013 and beginning 2014 at the 5,900 level
But by the middle of February, things started looking up. The 6,000 level of the PSEi fell behind and by the end of November, the market had been higher in nine out of the previous 11 months. However, as the market attempted to break to a new daily historic high closing, the market failed to progress above that level.
Overall though, the stock market performed well and once again it is at or near the top of the global list.
If you were paying attention well, 2014 was a year that provided a good educational experience for investors. There were many lessons to be learned.
“You can’t fight ‘The Fed’ or China”
IF you were listening to the experts at the beginning of 2014, you would have noticed that they had everything all figured out. The US Federal Reserve was going to stop its quantitative-easing program, interest rates would rise, and the global markets would tumble. The first item was true; the last two did not happen.
At every twist and turn of the Fed’s policy this past year, the markets supposedly had factored in future interest rate increases. Except, the rate increases never happened and, in fact, interest rates on US government debt are lower today than at the beginning of 2014, falling from 3 percent to 2.2 percent.
The “bubble experts” were predicting that 2014 would probably be the year China took a big hit. Sorry, maybe next year. The Shanghai Stock Exchange Composite Index ends 2014 up 50 percent.
“The market is always right”
THE stock price of Cebu Pacific was one of the worst performing issues in the last half of 2013 falling from P85 to P50. Now it is back to P85 and it is because of the collapse in the price of crude oil which will increase the company’s profits. But the price actually started climbing in April 2014, two months before the crude oil price topped out and started dropping.
When prices are going higher, buy. When prices are falling, sell. Company and even macro fundamentals are almost useless. Mark Douglas is someone that few if any local investors have ever heard of, but like myself, believes the key to stock market analysis is understanding market psychology.
Mr. Douglas says this: “Fundamental analysis creates what I call a ‘reality gap’ between ‘what should be’ and ‘what is.’ The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.”
“Intrinsic value” and “valuations” are terms used by “experts” to explain price movements after they have already occurred. The market is always right. Follow the money.
That brings me to the last lesson of 2014: “Money moves the markets, not events.” Too many stock market investors are obsessed with market analysis. Everyone wants to know why the price moves before they accept the validity of that movement. Do you really understand how electricity works? Do you give any thought at all to Coulomb’s law or the concept of free electrons or do you just flip the light switch and enjoy the benefits of the electricity?
In the last year, major companies have reported bad earnings and the price has gone up. Companies have reported bad earnings and the price has gone down. There were so many local stock exchange issues that came from nowhere to provide great profits this past year. What you may have learned is that while you are waiting to understand the reason, the smart money is getting wealthier. Take advantage of the moves and then let the experts explain to you why you are richer.
Now that 2014 fades into history with some lessons learned, what can we look forward to in 2015?
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.